The Federal Reserve may be on the verge of doing “the rare thing” by reducing inflation without significantly affecting jobs and growth, and it should be “extremely careful” not to rely too heavily on its past history of fighting inflation to develop new policy measures. Chicago Fed President Austan Goolsbee said this Thursday.
“Believing too firmly in the inevitability of a grand ‘trade-off’ between inflation and unemployment carries the serious risk of a short-term monetary policy error,” Goolsbee said, criticizing the “traditionalist view” that slowing inflation requires significant economic measures. pain in the form of rising unemployment and slowing growth, or even recession.
Goolsbee said long-held views about what it will take to end the battle against price pressure may no longer apply, and cited recent research by Chicago Fed staff indicating inflation could reach US central bank’s 2% target “soon”. and no new interest rate increases.
“Maintaining simple historical correlations about what growth and labor market conditions mean for inflation in the face of positive developments in supply is a recipe for overshooting and causing an unnecessary slowdown,” said Goolsbee, who currently votes on the Fed’s interest rate policy.
The inflation that erupted in 2021 was largely driven by supply shocks and labor shortages that gradually eased, he said, making it less necessary to discourage demand with high interest rates that would hurt jobs and growth in the process.
Goolsbee also said that “well-anchored” public expectations about inflation could allow the pace of price increases to decline “with less economic pain than was necessary in the past.”
Source: Terra
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