Fed's monetary policy mistake and the US post-COVID economic recovery |
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| Affiliation: | 1. Western Galilee College, Department of Economics, Israel;2. University College London, Cancer Institute, Department of Cancer Biology, United Kingdom;1. UniSA Business, University of South Australia, GPO Box 2471, Adelaide, South Australia 5001, Australia;2. College of Business, Government & Law, Flinders University, Bedford Park, South Australia 5042, Australia;1. Newcastle Business School, University of Newcastle, Australia;2. Centre for African Research, Engagement and Partnerships (CARE-P), University of Newcastle, Australia;3. Bond Business School, Bond University, Gold Coast, Australia;4. Centre for Data Analytics, Bond University, Gold Coast, Australia;5. Department of Economics, Shahjalal University of Science and Technology, Bangladesh;1. Bond Business School, Bond University, Gold Coast, Australia;2. Centre for Data Analytics, Bond University, Gold Coast, Australia |
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| Abstract: | This paper argues that the persistent inflation in the U.S. during the post-COVID economic recovery was mainly the result of the Fed’s policy mistake caused by an overestimation of the negative output gap. The paper shows that after a two-quarter contraction, the U.S. economy quickly rebounded and outpaced its potential output, thus remaining in overheating territory. However, policymakers prolonged the monetary expansion beyond the necessary, which contributed to fuel inflation for a more prolonged time. The policy mistake was the result of an inaccurate estimation of potential output. Based on an alternative estimation that uses full employment as a condition, this paper shows that the U.S. economy has been running with a positive output gap since mid-2021. The results illustrate that the Federal Reserve was well-behind the curve in an economy in overexpansion and with a galloping inflation escalating well-above the target. |
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| Keywords: | Monetary policy Central banking Federal Reserve System Output gap Full employment Inflation |
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