The Fed is getting a lot of credit for the rapid decline in inflation. Should it? It may have done the right thing for the wrong reasons.
Around this time last year, there was a lot of debate, some of it ill-tempered, about who deserved blame for soaring inflation. Now most of that is gone, replaced by a debate, some of it ill-tempered, about who deserves credit for the rapid decline in inflation.AP
But while the disinflation came, the rise in unemployment hasn’t, at least so far. And other measures of labour market strength, like the employed share of prime-age adults, have improved to levels not seen in decades. So how can we give credit to the Fed for disinflation when the mechanism through which monetary policy is supposed to reduce inflation doesn’t seem to be operating?
This argument provoked an acerbic response from Olivier Blanchard of the Peterson Institute for International Economics, who, you should know, isn’t just one of the world’s most respected macroeconomists but also normally a very even-tempered kind of guy. But he recently stated on X, the platform formerly known as Twitter, “Short of a direct effect on inflation expectations, or mind control, or price/wage controls, this requires slowing down the economy, and thus increasing unemployment.
The NFIB survey looks a lot like official inflation data: It shows a sharp rise in 2021-22, then a steep fall that has brought us most, but not quite all, of the way back to pre-pandemic inflation. Another reason is, as I’ve already pointed out, small businesses are unlikely to be parsing Fed statements and making pricing decisions based on their perceptions of Fed credibility.
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