In a few months, the Federal Reserve will be able to count six years that inflation has been above its 2% target, and central bankers’ own forecasts put “mission accomplished” sometime in 2029.
That means the Fed could fall short on the price-stability portion of its dual mandate for eight straight years—or as long as Operation Iraqi Freedom lasted.
Despite the obvious differences with the bloody Iraq war, the Fed’s inflation fight is also driven by events in the Middle East, this time in Iran.
Inflation was trending lower at the start of the year, as the initial spike from President Donald Trump’s tariffs last year was wearing off. Then crude prices soared after Iran closed off the Strait of Hormuz and attacked regional energy infrastructure in retaliation for U.S.-Israeli strikes.
While oil exports have rebounded with the help of U.S. military protection, supplies of refined products like gasoline and diesel remain tight, inflicting more pain at the pump for consumers.
At the same time, GDP growth is running hot as the AI hyperscalers pour hundreds of billions of dollars a year into the economy, adding more pressure on prices.
This past week’s consumer price index for October came in hotter than expected and showed that inflation is spreading beyond energy categories into more goods and services, alarming Fed officials.
Chicago Federal Reserve President Austan Goolsbee called the data “borderline disturbing,” and fellow policymakers have indicated more rate hikes are needed, possibly even a jumbo-sized increase of 50 basis points.
Meanwhile, the Iran war shows no signs of ending soon. Trump has backed down from repeated threats to restart major combat operations, but has also shot down negotiations, saying the U.S. doesn’t need a peace deal with Iran.
“We’re just keeping it the status quo,” Trump told reporters on Monday.
With the Iran conflict dragging on indefinitely, the Fed may have to readjust its inflation outlook again and get more aggressive on rates.
In September, the Fed’s summary of economic projections put down 2029 as the year when inflation is expected to fall back to 2%, pushing it back from a 2028 forecast made in June, as energy prices stayed high.
To be sure, there have been several shocks outside the Fed’s control since inflation first exceeded 2% back in early 2021. The pandemic saw supply-chain snarls and massive fiscal stimulus. Russia’s invasion of Ukraine in 2022 sent oil and gas prices soaring. Then came Trump’s trade war last year and his Iran war this year.
But Fed Chairman Kevan Warsh has argued that high inflation is a “choice,” suggesting shocks are no excuse. And the longer inflation stays above target, other central bankers have said they are less willing to be patient about rate hikes and “look through” short-term spikes.
Their fear is that an extended period of high prices will eventually cause consumers to lift their long-term inflation expectations and change currency spending patterns that fuel even more inflation.
That’s why the Fed has sounded more hawkish lately as policymakers look to ensure inflation expectations remain anchored and prevent consumers from believing there’s more tolerance for higher prices.
“I believe that the central bank has definitely got work to do to continue to reestablish its credibility,” Goolsbee told CNBC on Friday. “We’ve been above 2% for almost six years, and while it sometimes we were making progress, lately we’re not making any progress, and if anything, it’s going the wrong way.”
On Tuesday, Fed Governor Christopher Waller offered a similar message, saying a 50-basis-point rate hike should be considered at the Fed’s December meeting if October core consumer prices rose by 0.3% or more. In fact, they did rise 0.3% from the prior month.
“Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take,” he explained.
Also on Tuesday, Dallas Fed President Lorie Logan said in separate remarks that it “may be possible to move more rapidly” than what September’s quarter-point hike and October’s hold have implied. She warned the current 3.75%-4.00% policy rate is too low and adds to inflationary pressures.
Diane Swonk, chief economist and managing director at KPMG, noted Fed hawks are coalescing as inflation has been too hot for too long—and moving higher.
“Fed is losing its inflation fighting credibility,” she posted on LinkedIn this week. “Consumers who rely mostly on wages, not their stock portfolios, are paying the price.”
This story was originally featured on Fortune.com
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