Washington – In a highly anticipated speech last month, Federal Reserve Chair Jerome Powell declared that the nation’s long-standing battle with inflation had finally been won. The surge in prices that had plagued Americans for three years was now under control, and the Fed’s high interest rates had managed to achieve this without causing a recession or high unemployment.
However, despite this positive news, most Americans are not feeling the same sense of relief. Inflation may be falling, but the costs of essential goods such as food, gas, and housing remain significantly higher than before the pandemic. This has created challenges for Vice President Kamala Harris as she seeks to succeed President Joe Biden, with many voters expressing dissatisfaction with the administration’s economic record and frustration with high prices.
This disconnect between the views of economists and policymakers and those of everyday Americans is striking. In his speech at the annual economic symposium in Jackson Hole, Wyoming, Powell highlighted how the Fed’s aggressive rate hikes had successfully tamed inflation without causing a recession – a feat that was once thought to be nearly impossible.
“Some argued that getting inflation under control would require a recession and a lengthy period of high unemployment,” Powell said. “But the 4-1/2 percentage point decline in inflation from its peak two years ago has occurred in a context of low unemployment – a welcome and historically unusual result.”
With inflation now under control, the Fed is preparing to cut its key interest rate for the first time in over four years in an effort to sustain the job market. However, many Americans are still feeling the effects of high prices and are not in a celebratory mood.
“From the viewpoint of economists and central bankers, the decline in inflation has been a remarkable success,” said Kristin Forbes, an economist at MIT. “But from the viewpoint of households, it has not been so successful. Many have taken a big hit to their wages and feel like the cost of living has become unaffordable.”
This disconnect can be attributed to several reasons. Firstly, the Fed’s main goal is to manage inflation, not price levels. So while inflation may be falling, prices are still significantly higher than before the pandemic. Additionally, the Fed expects wages to catch up and eventually make these higher prices more manageable for consumers.
However, a survey by Harvard economist Stefanie Stantcheva found that most Americans view inflation as a negative consequence of excessive government spending or greedy businesses. They do not see it as a sign of a strong economy or a result of positive developments. This perception gap highlights the need for better communication between policymakers and the public.
Furthermore, the Fed’s approach to inflation may not align with the views of everyday Americans. While the central bank may be satisfied with inflation returning to its target of 2%, many consumers are still struggling to afford the higher prices. This raises questions about whether the Fed should have acted sooner to bring inflation under control.
In fact, the Fed has faced criticism for taking too long to raise interest rates. Inflation first spiked in 2020, but the Fed did not begin raising rates until nearly a year later, under the belief that it would be temporary. This delay may have contributed to the prolonged period of high prices and the public’s dissatisfaction with the Fed’s handling of inflation.
Ultimately, the test of a central bank is not to prevent inflation from ever occurring, but to effectively manage it when it does. As Andrew Bailey, governor of the Bank of England, stated, “The test of the regime is how well, once you get hit by these shocks, you bring it back to target.”
However, as the economy continues to recover from the pandemic, it is important for policymakers to consider the impact of their decisions on everyday Americans. Lessons can be learned from the recent inflation spike, including whether the Fed should have acted sooner to bring prices under control.
In conclusion, while the Fed may see the decline in inflation as a victory, many Americans are still feeling the effects of high prices. It is crucial for policymakers to bridge the gap between their views and those of the public and to consider the impact of their decisions on everyday Americans. Only then can we truly celebrate the defeat of inflation and move towards a more stable and prosperous economy for all.
