WASHINGTON – The extent to which the fate of the global economy is tied to the performance of the U.S. economy is never quite as apparent as when the Federal Reserve does something surprising, even if the surprise is minor.
That surprise came this week, when the central bank’s Federal Open Market Committee suggested that it would probably raise interest rates by a seemingly minor 0.5% in about two years.
Stocks tumbled in Tokyo and London in the hours after the Fed’s announcement, not because of the prospect of a small increase in interest rates two years in the future. Rather, it was because of what was perceived to be driving it: intensified concerns about rising inflation, and worries that the Fed is not doing enough to prevent inflation from accelerating to a point at which drastic action might become necessary.
As the U.S. economy comes back to life after a pandemic-driven recession, prices in certain sectors of the economy are rising much more sharply than many expected. Prices for cars, gasoline, food and housing are all up.
This was made plain Wednesday when the committee announced that the median expectation among its members was that annual inflation in 2021 will be 3.4% at year’s end, a full percentage point higher than it had predicted in April.
What it all means comes down to the question of who is correct — Fed policymakers or watchful inflation hawks such as Lawrence Summers, the former Clinton administration Treasury secretary, who fears the Biden…
