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This segment originally aired on April 20, 2023.
Laffer Tengler Investments CEO and CIO Nancy Tengler and BNY Mellon Investment Management Head of U.S. Macro Sonia Meskin discuss comments from the Cleveland Federal Reserve President in regards to ongoing inflation with Yahoo Finance’s Seana Smith and Dave Briggs.
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As the U.S. Federal Reserve continues to grapple with the challenges of keeping inflation in check, some analysts are warning that the central bank could end up “going too far” in its efforts to combat rising prices by relying too heavily on backward-facing economic data.

According to a recent report in CNBC, some experts are concerned that the Fed’s emphasis on historical economic indicators – such as consumer price index (CPI) readings from earlier in the year or even last year – could lead policymakers to overreact to short-term changes in the data and make decisions that are not optimal for the economy as a whole.

This concern stems from the fact that inflation is notoriously difficult to predict and control, especially in the short term. While data from previous months and years can be useful in identifying trends and patterns, it may not always be helpful in predicting how prices will behave in the near future.

This is especially true in the context of the ongoing COVID-19 pandemic, which has disrupted many aspects of the economy and made it more difficult to accurately forecast inflation. Factors such as supply chain disruptions, labor shortages, and changes in consumer behavior have all contributed to volatile and unpredictable price movements in recent months.

Despite these challenges, the Fed has signaled its commitment to keeping inflation under control. Earlier this year, the central bank revised its inflation target to an average of 2% over time, meaning it may allow inflation to run above or below this level in the short term but will aim to keep it steady over the longer term.

However, some experts argue that the Fed’s emphasis on backward-facing data could lead policymakers to overreact to short-term inflationary pressures and make decisions that are not optimal for the overall health of the economy. For example, if the Fed were to raise interest rates too quickly or too aggressively in response to a temporary increase in inflation, it could end up slowing down the economy and hurting employment and growth.

To avoid this scenario, some analysts are calling on the Fed to take a more nuanced approach to inflation targeting, one that takes into account not just backward-facing data but also forward-looking indicators such as future inflation expectations, macroeconomic trends, and other factors that may affect inflation over the medium and long term.

In the end, the challenge facing the Fed is a complex and multifaceted one. It must balance the need to keep inflation under control with the need to support economic growth and employment, all in the midst of unprecedented uncertainty and volatility. As the central bank continues to navigate these challenges, it will be important for policymakers to remain vigilant and adaptable, and to take a strategic and forward-looking approach to inflation targeting that will benefit the economy as a whole.