Federal Reserve Chair Jerome Powell has often pointed to the months before the pandemic as a heyday for the U.S. economy, and he is counting on an across-the-board return to economic conditions circa 2019 to help win a fight against high inflation without sparking higher unemployment.
It is a calculated gamble the world economy will emerge from the pandemic, a war in eastern Europe, and a potential reshuffling of global supply lines and still largely operate as it did before, without any permanent change in price and wage dynamics.
The Fed at its meeting last Wednesday penciled in what would be the fastest set of interest rate increases in 20 years to address inflation that is running at a 40-year high. It lifted the target federal funds rate by a quarter of a percentage point from the near zero rate established at the start of the pandemic, and policymakers projected the equivalent of a quarter-point increase at each of their six remaining meetings this year.
Major central banks in recent decades have put a premium on transparency and consider clear guidance about the path of policy as an important tool. Rate hike cycles have typically been described by words like "measured" or "gradual" that provide a clear steer on the pace of increases. Providing direction alone may be a tactical move by the Fed but it may also be a product of the moment, and uncertainty about whether the economy emerging from the health crisis will indeed snap back to pre-pandemic form.
What happened instead surprised policymakers, and created what Powell has described as a sort of golden moment of balance in the economy. Using a statistic Powell often cites, the number of jobs for each unemployed worker was high in 2018 and 2019 at around 1.2; it exploded during the pandemic to 1.7 jobs per jobless individual.
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