Inflation is retreating, giving new energy to Biden’s messaging after a year of price surges. But the early excitement could clash with the Fed’s goals.
If the economy keeps powering ahead, Jerome Powell says, the central bank will likely slam harder on the brakes to kill inflation. | Jess Rapfogel/AP PhotoPresident Joe Biden is traveling the country touting the resilience of the economy and its remarkably booming job market.
The path ahead will come into clearer focus on Tuesday when the Labor Department reports the Consumer Price Index for January, which is likely to show that inflation fell for the seventh consecutive month. It ran at an annualized rate below 3 percent during the second half of 2022 — an encouraging trend.
So if inflation is running close to the Fed’s 2 percent target rate even amid a hot labor market, why does the central bank feel the need to repeatedly warn that it’s poised to continue raising interest rates and risk a recession? Inflation is a complicated beast, and there’s a lot of history here. Basically, the Fed is willing to risk a recession if it means avoiding what happened in the 1970s — when the central bank backed off on interest rate hikes and inflation repeatedly came back with a vengeance. The logic is essentially this: We know how to deal with recessions. Killing inflation is harder. So it’s better to err on the side of overdoing it, since you can always change course and cut borrowing costs.That’s the multitrillion-dollar question.
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