The Federal Reserve (Fed) has chosen to do the bare minimum when it comes to raising its benchmark interest rate. Last month’s 0.25 percentage point increase was no more than the markets had expected.

It was the first time the Fed has raised rates in more than three years and marked a reversal of a zero-interest rate policy and injecting unprecedented levels of cash into the economy. Still, real interest rates – nominal rates adjusted for inflation – remain extremely low. Taking interest rates to near zero has caused one of the greatest asset bubbles in history. The Fed has its hands full to achieve a soft landing and get inflation back to its 2 percent target over the next three years.

That may be the triumph of hope over experience. After all, the Fed ignored all the warning signs, spending much of the last year telling Americans that inflation would be but a transitory problem.

The Fed feared that a larger hike would hold back the economy. On the contrary, the real threat to economic growth and living standards may come from a sustained period of high inflation, not small changes in short-term interest rates.

Inflation skyrocketed to 7.9 percent over the past year, according to the February report from the Bureau of Labor Statistics (BLS), the fastest increase since January 1982 when the U.S. economy confronted the twin threats of higher inflation and reduced economic growth.  Excluding food and energy, both of which moved sharply higher during the month, core inflation still rose 6.4 percent, the highest since August 1982.

Wherever you look, prices of essential materials, products, and services are shooting up at rates unseen in a decade or more. The most recent inflation problems have also been compounded by fast-rising gas prices.  In February, gasoline cost 6.6 percent more than in January, which translates to a nearly 40 percent annual increase.

The White House has largely blamed the inflation problem on supply chain disruptions during the COVID-19 pandemic, corporate greed, and now Putin’s war.  Blaming Putin is utter nonsense.  For sure oil prices have increased over the last two months, but consumer inflation rose from 2 percent to over 7 percent in the last year.

Food, housing, cars, recreation – it has all gotten more expensive.  This is attributable to an unprecedented government spending blitz coupled with persistent supply chain disruptions that have been unable to keep up with stimulus-fueled demand, particularly for goods over services.

That’s putting upward pressure on wages. But although wages are increasing, inflation is rising faster, meaning that workers are falling further behind.  Inflation-adjusted average hourly earnings fell 0.8 percent in February, contributing to a 2.6 percent decline over the past year, according to the BLS.

After allowing for inflation, the Fed funds rate is still exceptionally low, especially in real terms.  Indeed, with the CPI measure now expected to top 8 percent, raising nominal interest rates by just a quarter of a point hardly even counts as monetary tightening.  A larger hike would have sent a clear signal that the Fed is serious about getting inflation under control.

Inflation is something a large majority of Americans have not experienced in any meaningful way. Those who are under 50 have no memory of the high inflation rates from 40 years ago, so the current price increases come as a shock.

While the consensus view is that the Fed will raise the benchmark interest rate six times this year, these passive increases may be too little and too late to get inflation under control. The longer the Fed waits to raise rates aggressively, the harder it will be to bring down inflation and the worse it will be for the American economy and the living standards of ordinary people.