Fed needs to go beyond doubling its taper rate

After the hot inflation numbers out of the US, it would be inadvisable and unfortunate if the Federal Reserve were to resist at its policy meeting this week what have become broad-based calls for it to double the rate at which it is tapering its monthly bond purchases. In fact, the Fed should go well beyond that.
Sadly, the rather shocking consumer price index report for November was not an exception. It reaffirmed other data pointing to an inflation process that is stronger and more persistent than the Fed thought.
Annual inflation rose to 6.8% from 6.2%, a level not seen since 1982 in the midst of the Paul Volcker era at the central bank. The core measure of inflation, which is supposed to exclude the more historically volatile components — even though their impact on the most vulnerable segments of the population is particularly harmful — rose to 4.9% from 4.6%, also the highest for several decades.
Having failed to foresee this year’s surge in inflation and resisting repeatedly to sufficiently adjust their thinking based on updated and persuasive information, the few remaining inflation apologists still seem inclined to cling to the idea of “transitory” drivers to play down an already damaging price shock. In doing so, they fail to recall the rising probability of two phenomena that are uncomfortably familiar to those who either experienced or studied past bouts of high inflation:
First, the question is not whether some of the more powerful drivers of inflation will lose their potency; they certainly will. It is whether this happens after they plant the seeds for a broader inflation dynamic, which they are already doing. Second, the question is not whether this broader inflation dynamic will eventually reverse; it will. Rather, it is about limiting the damage that occurs during and after such a reversal.
Historically, as the world’s most powerful central bank, the Fed has been at the center of both these questions, with consequential domestic and international effects.
By failing to demonstrate a credible understanding of inflation and acting accordingly in a timely fashion, the Fed can itself be the cause of unanchored inflationary expectations. This creates a dynamic that is much more powerful and problematic than the original catalyst for inflation, which, in this case, is a sudden deficiency of aggregate supply because of supply chain disruptions and labour shortages.
As inflation becomes higher and more durable than it would have been otherwise, the danger increases not just of an unnecessary economic slowdown but also an outright recession.
Historically, this has been the result of the Fed having to slam on the policy brakes in a late and disorderly attempt to regain control of its credibility and its inflation mandate.
All this undermines livelihood in two unnecessary ways, both of which hit the poor particularly hard: by eroding purchasing power, especially for those who can least afford it, and by causing unemployment.
The Fed is already seriously lagging developments on the ground and their policy imperatives. It should have moved much earlier to ease its foot off the “pedal-to-the-metal” accelerator by curbing bond purchases in the late spring and early summer. Instead, it simply kept repeating the mantra that inflation was transitory and, in the process, undermined the steps taken by the Biden administration to curb inflation. Fortunately, the central bank still has a window, albeit small and shrinking fast, to act in an orderly fashion that minimises undue damage to livelihoods.

—Bloomberg