Unfortunately for the Fed, it will have to conduct monetary policy without a clear answer to the inflation question. It will have to hope that the monetarists are proven wrong and that it would not have endangered the economy by keeping interest rates too high and ignoring money supply developments. When Henry Kissinger asked for his opinion about the influence of the French Revolution, Chinese premier Zhou Enlai purportedly replied that two hundred years on it was “too early to tell.” Something similar might be said about today’s key economic question. Was 2022’s burst of inflation to over 9 percent due to transitory factors like the Covid-19 pandemic and Russia’s invasion of Ukraine? Or was it primarily due to the excessively expansive stance of budget and monetary policy?

The answer to the inflation question has considerable policy implications for the Federal Reserve.

If the burst in inflation was due to transitory factors, maybe the Fed did not need to slam on the monetary policy brakes as hard as it did last year to regain inflation control. Inflation would have slowed as the temporary supply disruptions wore off. If, on the other hand, 2022’s inflation was due to the Fed keeping interest rates too low for too long and allowing the money supply to balloon, maybe then the Fed’s current insistence on keeping interest rates high and allowing the money supply to contract will precipitate a recession and risk a bout of deflation.

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