Probably inverting the yield curve. But the Fed had to do it, just like the Japanese had to pop their bubble in the late 90s.
But I wouldn't call it a "failure". Because it worked.
So, Toddster, here’s what I’ve been trying to say for some time, though admittedly I’ve been doing a poor job of articulating it. Focusing on what happened post-2005 seems to me like saying “it wasn’t the fall from the 20th floor that killed him, it was the sudden stop.”
You say the Fed “had to” invert the yield curve just like the Japanese had to pop their earlier bubble, and I agree. It seems to me that if conditions forced them into a position of bubble-popping, or of pulling the reins on monetary aggregates, or of raising rates to an area where Taylor Rule says would lead to negative inflation or negative growth, or however anyone describes their actions... if they found themselves in a spot where that type of recession-inducing action was the best option available, there must have been some previous causative problem that put them in that position. Getting to that point was the problem, not how they reacted to being there - just like cancer - not the chemotherapy required to treat it - is the problem.
The corollary is that they could have decided to just let the bubble process continue, presumably with worse expected results (otherwise they would not have made the decision to tighten), which tells me that the condition itself - not the tightening - was the underlying problem.
I’ve argued that a “loose” blend of monetary, fiscal, & regulatory policy, combined with an unavoidable loosening of the technical definition of money since the widespread adoption of electronic forms of money and transactions all contributed to an unhealthy imbalance - an imbalance that some call “asset inflation” which cannot be measured by CPI or PCE or money aggregates, but which grows via the same mechanisms as consumer-goods price inflation, and which every responsible central bank in the world (including our own) has been pondering for a couple of decades because of its well-known lifecycle, from mania to panic to deep & prolonged real economic slumps. That is the fundamental problem which led to the tightening of the past couple of years, and which ignored would have presumable led to something worse.
They could have flattened the yield curve without inverting it. The problem is every major central bank inverted their curves at the same time, mainly to fight high oil prices, which is something Bernanke knew was bad, because it was one of his research topics before he became Chairman. I think that's one reason Bernanke was the first to blink and stopped hiking rates before everyone else.
I remember when our curve was first inverted, and Bernanke was asked why. He said 5% was a historically low rate, which is a very bad answer from a very smart person. Geniuses seem to lose their brains when they join the FOMC.