Jerome Powell Says The Fed Underestimated Inflation: Here's Where The Central Bank Went Wrong

The Federal Reserve has taken some heat for moving too slow to cool inflation. 

Fed Chair Jerome Powell looked back on what went wrong Thursday during the second day of a congressionally mandated semiannual report on monetary policy.

What Happened: Powell testified Thursday in front of the U.S. Senate Banking Committee and admitted the central bank was wrong about its inflation expectations.

"We did underestimate it. With the benefit of hindsight, clearly we did," Powell said. 

During the summer of 2021, inflation was falling on a month-over-month basis, the Fed chair said.

"That, I think, told us that our thesis that this was going to be a passing inflation shock was at least plausible," Powell said. "I think the data turned pretty hard in October and November and we very much changed our decision."

Since then, the Fed changed its stance and began tightening. The central bank raised rates by 25 basis points in March and then another 50 basis points in May. As inflation continued to prove hard to tame, the Fed raised rates by 75 basis points last week, its largest rate hike since 1994.

The Fed misjudged inflation after underestimating how long labor force and supply chain disruptions would linger, he said.

"That was the judgment we had to make. We knew it could be wrong and I think when it started to look pretty wrong, we pivoted," Powell said. 

Why It Matters: The Fed is aware of the hardships that inflation is causing and is committed to bringing down rising prices. Furthermore, Powell said the central bank will move "expeditiously" to do so.

"We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses," Powell said.

Related Link: Jerome Powell Tells Congress The Fed Is 'Moving Expeditiously' To Fight Inflation

The Fed expects ongoing rate increases to be appropriate. The pace of those changes depends on the upcoming CPI data and the evolving outlook for the economy.

CPI data for June is scheduled to be released on July 13 at 8:30 a.m. ET.

SPY Price Action: The SPDR S&P 500 ETF Trust SPY was up 0.18% at $374.75 at time of publication Thrusday, according to data from Benzinga Pro.

Photo: Federalreserve from Flickr.