by Christopher Rugaber
WASHINGTON (AP) — Federal Reserve Chairman Jerome Powell gambled last year that his ultra-low rate policies would help revive an economy that had plunged into a pandemic-induced recession. So far, his bets have mostly paid off.
Growth and hiring have rebounded faster than anyone expected. President Joe Biden on Monday elected him for another four-year term, citing his commitment to reducing unemployment.
Yet Powell’s challenge was hardly over. Inflation has hit a three-decade high, and Powell’s efforts to control it will be the toughest test of his next term. In doing so, they will also have to deal with additional complications, from the unusual nature of the pandemic’s recovery to the risk of being overtaken by other central banks around the world.
Keeping inflation under control will be especially difficult because the Fed hasn’t traditionally faced an overheated economy. Generally, the central bank can calm the threat of rapid growth and high inflation by raising its benchmark interest rate, which affects other lending rates throughout the economy. Doing so slows down the pace of borrowing and spending.
This time around, heavy government stimulus spending, the reopening of the economy and the release of pent-up demand as the Fed’s own policies – it has kept its short-term rate near zero since March 2020 – have supercharged consumer demand. The increase in spending has been mostly spent on goods such as cars, furniture and electronics. The surge in demand has closed ports and railways and been hit by labor and supply shortages. That combination of factors isn’t something the Fed can fix.
“It’s not your garden-variety of inflationary growth,” said Sarah Binder, a political scientist at George Washington University who has studied the Fed. “This pandemic economy is different. There’s really no playbook for this: How does the Fed always get a soft landing on target?”
At the same time, there are still 4 million fewer jobs in the economy than before the pandemic. Under a new policy framework adopted by the Fed last year, it has placed a renewed emphasis on reaching maximum employment. Should the Fed miscalculate and keep rates too low to try to spur further job growth, price hikes could accelerate. The central bank will then have to resort to sharp rate hikes to bring inflation back down. This, in turn, will run the risk of causing another recession.
“Without question, 2022 is going to be one of the most difficult years the Fed has to navigate,” said Claudia Sahm, senior fellow at the Jain Family Institute and former Federal Reserve economist. “They have a very complex task ahead of them.”
By most measures, the economy has fared well this year, even as high prices have undermined Americans’ confidence and made it harder for many families to afford food, fuel and other necessities. On Monday, introducing Powell and a member of the Fed’s board of governors — Lyle Brainard, their nominee for vice president — Biden announced that the US economy had “gone from an economy that is closed to an economy that has who is leading the world financially.” development.” He also credited his policies and the Fed.
“Things are getting better for American workers,” the president said. “Higher wages, better benefits, more flexible schedules. …savings have gone up, home equity has gone up.”
Yet consumer prices also skyrocketed 6.2% in the 12 months ending October, the sharpest year-on-year jump since 1990. Powell, after previously describing high inflation as only “transient”, now acknowledges that it may continue well into the next. Year.
Most analysts expect the Fed to try to rein in inflation at least twice in 2022, which the Fed wants to average 2% annually over time. But raising those rates will create challenges of their own. Under the new framework devised by Powell and Brainard, the Fed wants maximum employment that is “broad and inclusive.” That means it will take into account other data points, such as the unemployment rate for black Americans, not just the overall unemployment rate.
Yet if the overall unemployment rate falls below 4% next year—it’s 4.6% right now—in what many Fed officials would regard as full employment, African-American unemployment will likely be much higher, the perennial racial gap in unemployment. looking at . Black unemployment is currently at 7.9%.
Stephanie Aaronson, a former Fed economist who now directs economic studies at the Brookings Institution, said the Fed has often said it wants to strengthen the economy as much as possible to help disadvantaged workers gain jobs or earn higher wages. wants to increase. If the central bank instead starts raising rates to curb inflation, it could stifle some of the potential gains in employment.
If that should happen, Aaronson said, “he has to say why he didn’t wait longer.”
He said Fed officials can note that high inflation also hurts low-income workers.
“They can make it clear, but they have to start over,” Aaronson said.
Joseph Stiglitz, a Columbia University economist and Nobel laureate in economics, suggested that the Fed also needs to consider the global consequences of its policies. For example, the European Central Bank has indicated that it still views high inflation mostly as a temporary phenomenon. This suggests that Powell may raise rates before the ECB, especially if he does so in the first half of next year.
“That would lead to a rise in the (dollar) exchange rate that would reduce our exports, which would reduce American competitiveness and which would undermine our economy,” warned Stieglitz, who backed Brainard for Fed chair.
AP Economics writer Paul Wiseman contributed to this report.