Statement on My FOMC Dissent

I dissented against the FOMC’s policy action this week because I preferred to raise the target range for the federal funds rate by 0.25 percentage point.

Inflation has been elevated relative to our 2 percent target for more than five years. The initial cause of that inflation was, in part, a series of supply shocks, such as supply chain disruptions from the pandemic, the war in Ukraine, the trade war and, most recently, the Iran conflict. The massive investment in data centers has also added a new demand element to the high inflation Americans are experiencing.

Economic theory argues that monetary policy is the right tool to address demand-driven inflation but faces greater trade-offs when dealing with supply shocks. In the face of individual supply shocks that temporarily elevate inflation, monetary policymakers should “look through” the shock and allow it to pass on its own. I largely subscribe to that view, but I increasingly believe that monetary policy does have an important role to play in addressing a series of successive supply shocks that might lead to entrenched higher inflation.

Indeed, monetary policymakers during the 1970s also diagnosed the extraordinary inflation of that period as largely the result of a series of successive supply shocks affecting commodities, food and energy markets. Policymakers ultimately concluded that tight monetary policy was necessary to bring inflation back down despite their original supply shock diagnosis.

Of course, there are many differences between the economy in the 1970s and today. The economy today is in a much, much better place than it was then: Unemployment is lower and inflation is much lower. But to manage against the risk that high inflation could become entrenched, I would rather tighten policy incrementally as we gather more data on the path of inflation and employment. If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary. On the other hand, if inflation durably fades, a strategy of small policy steps would allow the FOMC to slow or pause subsequent adjustments without unnecessary impact on the real economy.