Analysis-Fed's credibility is an asset whose decline could be costly

By Howard Schneider

WASHINGTON (Reuters) -The Federal Reserve may have been late raising interest rates as inflation surged in 2021, but measures of inflation expectations throughout that period showed broad belief that prices would cool, a fact that made the battle easier and less costly to wage, with bond markets even tightening financial conditions well before the U.S. central bank hiked borrowing costs.

In a paper presented to global central bankers at a Fed conference in Wyoming on Saturday, Emi Nakamura, an economics professor at the University of California, Berkeley, said the episode showed the value of Fed credibility in action, and also the stakes on the table if that trust is eroded – a no-longer abstract risk after President Donald Trump moved on Monday to fire Fed Governor L