On the thirtieth of November 2021, Jerome Powell appeared before the Senate Banking Committee and said something that Federal Reserve chairmen are not in the habit of saying in public. He said that the word was wrong. The word in question was "transitory," which the Federal Open Market Committee had employed with remarkable consistency throughout 2021 to describe the rise in consumer prices then under way, and which had appeared, in one formulation or another, in every post-meeting statement issued by the FOMC from the spring of that year through the autumn [1]. Powell told the committee that it was "probably a good time to retire that word and try to explain more clearly what we mean" [2]. The admission was as close as a Federal Reserve chairman comes, in public, to acknowledging a mistake, and the markets understood it as such.
What followed that admission is now a matter of record: the most aggressive monetary tightening cycle the Federal Reserve had conducted since the early 1980s, a five-hundred-and-twenty-five-basis-point increase in the federal funds rate between March 2022 and July 2023 [3], a peak in consumer price inflation of nine-point-one per cent in June 2022 that had not been seen since November 1981 [4], and, eventually, a recovery sufficiently gradual and sufficiently durable to permit the institution to begin cutting rates in September 2024. What is less settled, and what the distance of four-and-a-half years now permits us to examine more carefully, is the nature of the underlying failure: not the word, which was in itself harmless, but the analytical and institutional framework that caused an institution of the Federal Reserve's resources and intellectual depth to mistake a generalised inflationary surge for a category of price disturbance that would resolve itself without monetary intervention.
The Framework That Created the Permission
To understand why the Federal Reserve maintained its federal funds rate in the range of zero to twenty-five basis points through the whole of 2021, even as consumer prices accelerated sharply above its two per cent target, it is necessary to understand the framework within which the FOMC was operating: the Average Inflation Targeting regime that Jerome Powell had announced at the Jackson Hole symposium of August 2020 [5]. The announcement, which was the culmination of a formal framework review that the Federal Reserve had begun in early 2019, was presented as a response to the particular challenge of the post-2008 low-interest-rate environment, in which the Federal Reserve's ability to stimulate the economy by cutting rates was constrained by the proximity of rates to their effective lower bound. Under the new framework, the FOMC would seek inflation that "averages two per cent over time," which in practice meant that periods of below-target inflation would be deliberately offset by periods of above-target inflation, and that the institution would not pre-emptively tighten policy merely because inflation had crossed the two per cent level after years of running below it.
The framework was intellectually coherent for the world it was designed to address: a world of persistently insufficient demand, structurally low inflation, and chronically low interest rates. It was, at the moment of its adoption in August 2020, an entirely reasonable response to the conditions that had prevailed for the preceding decade. The difficulty was that within twelve months of its adoption, the economic environment had changed in ways that the framework had not been designed to accommodate. The pandemic-related fiscal stimulus, the supply chain dislocations, the sharp recovery in goods demand, and the subsequent reopening of the services sector created, in combination, an inflationary impulse that bore little resemblance to the demand-shortfall problem that the new framework had been constructed to solve. But the framework did not contain a mechanism for distinguishing between above-target inflation that represented the welcome normalisation the AIT regime had been designed to permit and above-target inflation that represented a genuine generalised price-level problem requiring monetary restraint. Both appeared, in the FOMC's summary statistics, as elevated inflation readings. The response to both, under the new framework, was the same: patience.
The framework did not contain a mechanism for distinguishing between inflation it had been designed to permit and inflation that required restraint. Both appeared, in the summary statistics, as elevated readings.
A Diagnostic Error with Precedents
The history of central banking offers a warning about the particular species of intellectual failure involved here. Arthur Burns, who served as Chairman of the Federal Reserve from 1970 to 1978, presided over what became known as the Great Inflation, the sustained acceleration of consumer prices from roughly two per cent in the mid-1960s to a peak of more than fifteen per cent in early 1980. Burns has acquired, in retrospect, a reputation as the worst chairman in the Federal Reserve's modern history, and the criticisms are not without foundation. But the interesting question about Burns is not whether he failed; it is why he failed, because the answer is more instructive than the mere fact of the failure.
Burns did not believe that monetary policy was the primary driver of the inflation he was observing. He regarded the price increases of the early 1970s as originating in structural factors: private monopoly power, administered pricing, agricultural shocks, and the energy crisis following the 1973 Arab oil embargo [6]. His diagnosis was that the causes of inflation were largely beyond the reach of monetary policy, and that aggressive tightening would produce unemployment without commensurately reducing prices. The diagnosis was wrong, but it was not obviously wrong at the time, and it found support among many economists. The consequence of the wrong diagnosis was a monetary policy calibrated to the wrong problem: the Federal Reserve accommodated an inflationary surge it should have resisted, on the grounds that the surge was fundamentally non-monetary in character. By the time the error was evident, inflation expectations had become unmoored and the cost of restoring price stability required, under Paul Volcker, an episode of deliberate recession that drove unemployment above ten per cent [7].
The parallel to 2021 is not precise, and I do not wish to press it further than the evidence warrants. But the structural similarity is too important to ignore. In both cases, a Federal Reserve operating under an articulate and internally consistent analytical framework diagnosed rising prices as originating in factors that would resolve without sustained monetary intervention: supply-side and structural factors in Burns's case; pandemic-related supply disruptions and concentrated goods price movements in the FOMC's case. In both cases, the diagnostic error created an institutional permission to maintain accommodative policy in the face of accelerating prices. In both cases, the cost of correcting the error was substantially higher than the cost of acting earlier would have been. The difference, and it is a significant one, is that the FOMC of 2021 and 2022 did not repeat Burns's subsequent error of premature relaxation; when Powell acknowledged that "transitory" was wrong, the institution moved with speed and determination that contrasted sharply with the hesitation that had preceded it.
The Rate That Tells the Story
As the accompanying chart illustrates, the Federal Reserve's policy rate trajectory from 2018 through to the present describes, with unusual clarity, the institutional experience of the period: a tightening cycle that ended prematurely in late 2018, an emergency zero-rate response to the pandemic in March 2020, an extended period at the effective lower bound through 2021, then the sharpest tightening cycle in four decades, followed by a gradual descent from the peak of five-and-a-quarter to five-and-a-half per cent as inflation came under control. The chart also traces, on a secondary axis, the consumer price inflation that provided the context for those decisions. The visual is eloquent: the gap between the two series in 2021 and early 2022, when CPI inflation was running at four, five, six, seven per cent while the policy rate remained at zero, represents the cost of the diagnostic error in the most direct possible form.
The tightening cycle that began in March 2022 was, by any historical measure, extraordinary. The Federal Open Market Committee raised rates eleven times between March 2022 and July 2023, increasing the target range by five hundred and twenty-five basis points in sixteen months [3]. Four consecutive increases of seventy-five basis points, each the largest single-meeting move since 1994, were delivered in June, July, September, and November of 2022. The pace was the fastest since the early 1980s, when Paul Volcker's Federal Reserve was engaged in the deliberate and explicitly acknowledged project of breaking inflation expectations that had become entrenched after a decade of accommodative policy under Burns. The comparison was not comfortable for the institution, but it was impossible to avoid: the Federal Reserve was, in 2022, conducting the monetary equivalent of the Volcker disinflation, with the important difference that the inflation being addressed had been running for eighteen months rather than a decade, and that the expectations it needed to re-anchor had not, in fact, become seriously unmoored.
Jackson Hole, August 2022: The Decisive Statement
The intellectual and communicative turning point came on the twenty-sixth of August 2022, when Jerome Powell delivered a remarkably brief, remarkably blunt address at the Jackson Hole symposium. The speech ran to fewer than thirteen hundred words, which for a Federal Reserve chairman addressing the annual gathering of central bankers and economists is almost startlingly concise, and its message was correspondingly unambiguous. "Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance," Powell said, and then, drawing explicitly on the lessons of the 1970s: "The historical record cautions strongly against prematurely loosening policy" [8]. He invoked Volcker by name, and he cited the lesson of the 1970s as the dominant consideration: that an inflation psychology, once established, requires a painful and prolonged monetary response to dislodge. The markets fell sharply on the day of the speech, which was the correct response to a communication that was, in substance, a promise of continued pain.
What is significant about the Jackson Hole speech of 2022 is not merely its content but its function. Powell was not, at that moment, primarily attempting to affect the real economy through the speech; the rate increases would do that work. He was attempting to affect expectations: to communicate, credibly and irrevocably, that the Federal Reserve had completed its diagnostic revision and was now committed to the price stability mandate with the same determination that Burns had been unable to muster and Volcker had been required to exercise at far greater cost. "Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy," Powell said [8]. The sentence was not analytical. It was declarative, and its purpose was to reconstruct, in public, the institutional commitment to a mandate that the events of the preceding eighteen months had caused markets to question.
Whether the Expectations Held
The question that will ultimately determine the historical assessment of the Federal Reserve's conduct in this period is not whether it made an error in 2021, which it plainly did, but whether the error caused lasting damage to the institution's most critical asset: the credibility that allows its forward guidance to influence expectations, and its expectations influence to transmit policy more efficiently than the mechanical effects of rate changes alone. On this question, the evidence is somewhat more favourable to the institution than the severity of the initial misjudgement would have suggested.
Research from the Federal Reserve Bank of Kansas City, examining market-based and survey-based measures of inflation expectations during the 2021 to 2023 period, found that while shorter-term expectations rose sharply in response to the inflation surge, longer-term expectations, those most relevant to wage-setting and investment decisions, remained relatively anchored throughout [9]. The five-year, five-year-forward breakeven inflation rate, derived from Treasury Inflation-Protected Securities, rose but did not approach the levels seen in the early 1980s. This is not a vindication of the FOMC's initial conduct; the expectations would not have remained anchored if the institution had continued to delay. But it does suggest that the eventual forceful response was sufficiently credible, and sufficiently timely, to prevent the more serious consequence of an expectations de-anchoring of the kind that prolonged the inflationary episode of the 1970s by years.
The Counter-Argument, Fairly Stated
Intellectual honesty requires that the strongest case for the Federal Reserve's 2021 conduct be stated here, and it is a case that deserves more than dismissal. The post-pandemic inflationary episode was, in several measurable respects, genuinely unlike the demand-driven inflations that monetary policy is most naturally designed to address. The supply chain disruptions of 2020 and 2021, the semiconductor shortage, the shipping bottleneck, the energy price shock following the invasion of Ukraine in February 2022: these were real supply-side phenomena, and the case that tighter monetary policy in early 2021 would have materially reduced their inflationary impact rests on assumptions about the wage-price dynamics that operate with a lag. A Federal Reserve that raised rates aggressively in early 2021 might have achieved little additional disinflationary effect while causing an earlier slowdown in an economy still recovering from the pandemic shock.
There is also the specific structural problem that the AIT framework created. The Richmond Federal Reserve's Economic Brief on the dual mandate notes that the framework explicitly permitted above-target inflation following periods when inflation had run persistently below target [10]. By adopting the new framework and communicating it clearly, the Federal Reserve had, in effect, publicly committed to tolerating elevated inflation for a period, in order to average two per cent over time. When inflation did rise above two per cent in the spring of 2021, the FOMC was observing the precise scenario that the framework had been designed to permit. The error, on this reading, was not in the initial application of the framework but in the failure to recognise, sufficiently quickly, that the inflation being observed was not the modest, self-correcting kind that the AIT rationale had contemplated, but a broad-based, self-reinforcing surge of a fundamentally different character. That distinction is easier to make in retrospect than it was to make in real time, in the spring and summer of 2021, with supply chains still disrupted and the pandemic still exerting its distorting effects on demand composition.
The Soft Landing and What It Means
On the eighteenth of September 2024, the Federal Open Market Committee reduced its policy rate by fifty basis points, the first cut in more than four years, initiating an easing cycle that by December of 2025 had reduced the federal funds target range from its peak of five-and-a-quarter to five-and-a-half per cent to three-and-a-half to three-and-three-quarters per cent, a cumulative reduction of one-hundred-and-seventy-five basis points [11]. During that same period, the US unemployment rate remained below five per cent, and the PCE deflator, the Federal Reserve's preferred measure of inflation, declined toward a range consistent with the two per cent target. The economy had achieved, in the terminology that had been regarded as optimistic as recently as 2022, something resembling a soft landing: inflation brought substantially toward target without the kind of recessionary unemployment that Volcker's disinflation had required [12].
The soft landing outcome does not retrospectively vindicate the 2021 framework error; the costs of the tightening cycle were real, and they were distributed unevenly, bearing most heavily on interest-rate-sensitive sectors and on households carrying variable-rate debt. But it does complicate the narrative of institutional failure in an important way. The Federal Reserve's credibility problem of 2021 and 2022 was not fundamentally a problem of policy tools, which remained effective, but a problem of diagnostic accuracy and the institutional willingness to revise a recently adopted framework in the face of evidence that the framework's assumptions no longer held. Having made the revision, forcefully and publicly, the institution demonstrated that its underlying credibility was not permanently impaired: markets continued to believe that the Federal Reserve would ultimately deliver on the price stability component of its dual mandate, and that belief, maintained despite the initial error, was precisely what allowed the eventual disinflation to proceed without the sustained recession that a full de-anchoring of expectations would have required.
Where the Federal Reserve stands today, in March of 2026, is in a position that its detractors of 2022 would have found improbable: rates in the mid-threes, inflation approaching but not yet at target, employment holding near its historical highs, and institutional credibility, while diminished from its pre-pandemic standing, sufficiently intact to permit the gradual normalisation now under way. The December 2025 Federal Open Market Committee projections showed a median expectation of one further twenty-five-basis-point reduction in 2026, with PCE inflation projected at two-point-four per cent by year-end and the longer-run neutral rate estimate revised upward, a reflection of the genuine uncertainty about whether the post-pandemic economy operates on the same structural parameters as the pre-pandemic one [13].
The Lesson That the Institution Must Retain
The Federal Reserve's experience of 2021 to 2024 will be studied for a generation, and the lesson that emerges from it is not, I think, the obvious one about the word "transitory." The word was an unhelpful marker, but the word was a symptom rather than the disease. The disease was the tendency of an institution operating within a recently adopted analytical framework to interpret incoming evidence through the lens of that framework's assumptions, even as the evidence increasingly suggested that the assumptions were wrong. This is not a uniquely Federal Reserve pathology; it is a pathology common to any institution that has recently invested intellectual and reputational capital in a framework and faces the question of when the framework should be revised. The Humphrey-Hawkins Act of 1978, which codified the Federal Reserve's dual mandate of maximum employment and price stability, was itself a response to a period of institutional failure under Arthur Burns; the irony is that the new analytical framework adopted in 2020, partly in response to the post-2008 experience of persistently below-target inflation, contributed in its own way to the conditions that required the framework to be abandoned.
Paul Volcker, asked in his later years what lesson he would transmit to his successors, is reported to have replied that the lesson was simple: inflation is easier to prevent than to cure, and the moment a central banker allows himself to believe that rising prices reflect factors beyond the reach of monetary policy, the cure is already more expensive than it needed to be. The Federal Reserve of 2021 had not, I think, forgotten that lesson. It had, more precisely, convinced itself that the lesson did not apply to the situation it was facing. The distinction is not merely semantic. An institution that has forgotten a lesson can be reminded of it. An institution that has decided the lesson does not apply to the present case requires something harder to provide: the willingness, in the midst of a distinctive and genuinely unprecedented economic environment, to distrust its own framework's exceptionalism. That willingness, when it came in the autumn of 2021 and was confirmed at Jackson Hole in August 2022, was what ultimately preserved the institutional credibility that central banking is built upon. That it came at greater cost than was necessary does not make its arrival less significant; it makes the circumstances of its delay the more important to understand.
- Federal Reserve. "FOMC Statement." Federal Open Market Committee, July 27–28, 2021. 28 July 2021. federalreserve.gov
- Powell, Jerome H. "Press Conference Transcript." Federal Open Market Committee, November 3, 2021. Federal Reserve Board. 3 November 2021. federalreserve.gov
- Federal Reserve Board. "The Federal Reserve's Responses to the Post-Covid Period of High Inflation." FEDS Notes. 14 February 2024. federalreserve.gov
- U.S. Bureau of Labor Statistics. "Consumer Price Index, All Urban Consumers." FRED, Federal Reserve Bank of St. Louis. Accessed March 2026. fred.stlouisfed.org
- Powell, Jerome H. "New Economic Challenges and the Fed's Monetary Policy Review." Speech at the Jackson Hole Economic Symposium. Federal Reserve Board. 27 August 2020. federalreserve.gov
- Federal Reserve Bank of Minneapolis. "Economist in an Uncertain World: Arthur F. Burns and the Federal Reserve, 1970–1978." Federal Reserve Bank of Minneapolis. 1996. minneapolisfed.org
- Federal Reserve History. "Full Employment and Balanced Growth Act of 1978 (Humphrey–Hawkins)." Federal Reserve History. federalreservehistory.org
- Powell, Jerome H. "Monetary Policy and Price Stability." Speech at the Jackson Hole Economic Symposium. Federal Reserve Board. 26 August 2022. federalreserve.gov
- Federal Reserve Bank of Kansas City. "Despite High Inflation, Longer-Term Inflation Expectations Remain Well Anchored." Economic Bulletin. Federal Reserve Bank of Kansas City. kansascityfed.org
- Federal Reserve Bank of Richmond. "The Federal Reserve's 'Dual Mandate': The Evolution of an Idea." Economic Brief, EB 11-12. November 2011. richmondfed.org
- Federal Reserve Board. "Federal Reserve Issues FOMC Statement." FOMC Statement, September 18, 2024. 18 September 2024. federalreserve.gov
- Federal Reserve Board. "Federal Reserve Issues FOMC Statement." FOMC Statement, December 10, 2025. 10 December 2025. federalreserve.gov
- Federal Reserve Board. "December 10, 2025: FOMC Projections Materials." Federal Open Market Committee. 10 December 2025. federalreserve.gov