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Opinion The Federal Reserve should go big now to fight inflation

Fed Chair Jerome H. Powell at a news conference in Washington on May 4. (Al Drago/Bloomberg News).
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Federal Reserve Chair Jerome H. Powell proved he could act swiftly and decisively in March 2020 as the coronavirus exploded around the world and large parts of the economy halted. Now, Mr. Powell needs to adopt bold and aggressive tactics again to fight inflation. The time for steady and gradual moves from the Fed is over.

Ideally, Mr. Powell and his team would announce a larger-than-planned 75-basis-point increase in the Fed’s benchmark interest rate this week, raising it from about 1 percent now to about 1.75 percent. For the past month, top Fed officials have been signaling they will do a 50-basis-point increase, but that was before the disastrous May inflation report that came out Friday and showed large price shocks in gas, groceries, rent, airfares, cars and various services. Inflation is broad-based. It won’t be easily cured. And numerous polls and surveys show Americans expect high inflation to stick around. The Fed needs to take decisive action — the sooner, the better. Otherwise, Mr. Powell risks losing the public’s confidence.

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In the past decade, the Fed has tended to prefer modest moves in order not to spook markets or the public. But inflation is already spooking people. The stock market has slumped into bear market territory. The bond market is flashing recession warning signs. The real estate market is drying up. Investors predict the Fed has to hike interest rates 175 basis points by the end of September. That means at least one 75-basis-point hike would be needed. The Fed gains little by delaying the pain that everyone sees coming at this point. The biggest risk for the Fed is not doing enough to fight inflation. The board already made this mistake earlier in the year. It should not stumble again.

Danielle DiMartino Booth, chief executive of Quill Intelligence and a former top Dallas Fed official, put it bluntly Monday: “The Federal Reserve’s slow and steady approach to tightening policy is now an outright insult to working Americans.” Inflation is up 8.6 percent in the past year, far outpacing average pay gains of 5.2 percent.

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At a minimum, the Fed needs to enact the expected 50-basis-point increase this week and heavily signal the possibility of a larger hike at its next meeting in late July. The ongoing strength of the job market gives the Fed some room to hike aggressively now without doing much, if any, damage to employment. That window could close soon as executives increasingly fear a recession and will likely pull back on hiring. It’s yet another reason to go big now.

The conventional wisdom is that monetary policy is mostly about talk and setting expectations; former Fed chair Ben Bernanke recently said it’s “98 percent talk and 2 percent action.” But the nation needs to see action at this time. After wrongly calling inflation “transitory” for much of last year, the Fed must prove that it is serious about tackling this substantial threat to the U.S. economy.