The Federal Reserves latest policy statement reveals a dogged determination to accommodate despite increasing evidence of economic recovery, strong demand for labor and rising inflation. Chairman Jerome Powell seems eager to urge patience on raising interest rates for the sake of increasing labor participation. This approach reflects lessons learned about economic growth during the Trump administration, but changed conditions render it inappropriate for the current moment.
It isnt that the framework is faulty. To the contrary, it incorporates the realization that low unemployment combined with productivity gains isnt inflationary because it results in increased output. This contradicts the Phillips-curve notion that low unemployment leads to high inflationwhich central banks must then counter by raising interest rates.
The Feds review of its monetary-policy framework leading to its current approach was conducted over the 18 months before the pandemic began in early 2020. The timing was unfortunate, as the review encompassed the extraordinarily high-growth, low-unemployment, low-inflation environment of 2018-19. Mr. Powells mistake now is to ignore the changed circumstances stemming not only from the pandemic but also the Biden administrations tax and regulatory changes.