The author is Alfred Lerner, Professor of Banking and Financial Institutions at Columbia Business School and former Federal Reserve President

The Federal Reserve has been robbed by reality.The current inflation rate is now over 6%, a level not seen in nearly 40 years, and is proving to be more durable Exceeded expectations of Fed policymakers. Why is Fed monetary policy lagging behind in tightening monetary policy to control inflation?

Three flaws in the Fed’s monetary policy framework have led to overextended monetary policy.

First, insufficient attention has been paid to demand shocks. The Fed’s view is that the inflation spike will be short-lived due to the widespread negative supply shock to the economy from Covid-19.

While negative supply shocks are certainly one of the reasons for the spike in inflation, the Fed has not paid enough attention to very strong positive demand shocks.

The pent-up demand from households unable to spend during the pandemic and the unusually expansionary fiscal policies pursued by the Biden administration have led to high demand for goods and services. Indeed, inflation will be temporary when supply bottlenecks dissipate over time. But the strong positive demand shock has led to persistently high inflation, which we are currently experiencing.

The second flaw is the Fed’s view of the Phillips curve, the theory that unemployment and inflation are inversely related. Officials have declared the Phillips curve dead because the unemployment rate is below its “natural rate” (the economy is at full employment). Presumably, this means that higher employment is no longer an important factor driving inflation higher.

I researched came up with Research with co-authors at the U.S. Monetary Policy Forum a few years ago showed that the Phillips curve is not dead, but hibernating.

The weak link between unemployment and inflation hinges on the Fed taking pre-emptive measures to counter rising inflation, a policy the Fed has now abandoned.

Instead, the Fed has pledged to keep monetary policy expansionary until full employment is achieved. A summary of economic forecasts by the policy-making Federal Open Market Committee suggests this will occur with a natural unemployment rate of about 3.5%.

Unfortunately, past economic research has shown that the natural rate of unemployment is a notoriously difficult number to estimate. In fact, other indicators of a tight labor market, such as a large number of job openings and rising wages, suggest that we have reached full employment, so the natural unemployment rate is above the target level of 3.5%.

Past underestimation of the natural rate of unemployment has led to serious inflationary policy errors: the so-called Great Inflation period of the late 1960s and 1970s is a classic example, when the Fed assumed the natural rate of unemployment to be around 4%. When later evidence suggested it was a few percentage points higher.

The third flaw is the Fed’s poor implementation of the new “average” inflation targeting framework.Fed turns average inflation target, the goal is to average 2% over a specific time frame, say five years, a policy that I and many other economists advocate.

However, the Fed has been reluctant to disclose the average, which effectively reduces the credibility of the 2% inflation target. The long-term means that inflation can stay above 2% for a long time without raising the average significantly.

As a result, the Fed’s reluctance to provide more information about the range of its average inflation target undermines the Fed’s credibility to keep inflation around 2%. Inflation expectations may now become unstable, making persistently high inflation possible.

While U.S. CPI inflation is highly likely to ease from its current level of 6.8% as supply bottlenecks from the Covid-19 pandemic diminish, it will continue to significantly exceed the Fed’s target. The Fed needs to recognize the flaws in its monetary policy framework and revert to a more pre-emptive approach to controlling inflation. Failure to do so would result in not only persistent inflation well above the 2% target, but ultimately a sharp increase in interest rates to push inflation back down, which would wreak havoc on the economy.