Analysis: Pandemic broke the Fed’s model, and this week could show just how much

Analysis: Pandemic broke the Fed’s model, and this week could show just how much

Jerome Powell, chairman of the Fed (Federal Reserve), used his first four years at the helm of the US central bank to reshape monetary policy around the idea that low inflation and unemployment could coexist.

It was a move intended to more widely spread the gains from economic growth and maintain a focus on employment during the recovery from the pandemic.

But the assumptions on which it was based — a relatively frictionless global economy with a well-oiled supply chain; a balanced US job market with little more than one job open for every jobless—have been shaken by events that appear to have put the Fed’s two targets of full employment and moderate inflation back into opposition.

The current 3.6% unemployment rate is more similar to the 1950s and 1960s, with workers exerting leverage to negotiate higher wages and, given the pandemic, better working conditions.

Inflation, however, is rising at more than 8% a year, leaving Fed officials at a crossroads over how to tame it and facing the possibility that their “narrow trajectory” back to the pre-pandemic world of unemployment and low inflation may have been closed.

Fed officials are expected to raise interest rates for the third time this year on Wednesday, with a 0.5 percentage point increase seen as the likely outcome, along with signs of plus, provided inflation continues to outpace. by far its 2% target.

In new projections, they will also give their view of what is at risk and the price the economy may pay through slowing growth and rising unemployment to bring inflation back into line.

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