The Fed is accepting a ‘soft landing’ even if most Americans are reluctant to applaud

WASHINGTON (AP) – When Jerome Powell gave a high-profile speech last month, the chairman of the Federal Reserve. it came very close he once had to announce that the rise in inflation that had plagued the nation for three painful years had now been defeated.

And not only that. The Fed’s higher rates, Powell said, have been able to achieve that goal without causing trouble very predictable recession and high unemployment.

However, many Americans do not share the same feelings of celebration inflationary collapse because of the high lending rates that the Fed has set. Although customer reviews a rising slowlymost Americans in some surveys are complaining about high prices, considering that the cost of necessities such as food, gas and housing remain very high where they were before the outbreak in 2020.

Negative public opinion is creating problems for Vice President Kamala Harris as she seeks to succeed President Joe Biden. Despite falling inflation and strong job growth, many voters say they are dissatisfied with the economic record of the Biden-Harris administration – and are especially frustrated by high prices.

That disparity points to a striking gap between how economists and policymakers assess the past few economic years and how many average Americans do.

To his statements Last month, delivered at the annual economic conference in Jackson Hole, Wyoming, Powell highlighted how the Fed’s rate hikes were more successful than many economists had predicted by manage inflation without slowing the economy — something that was notoriously difficult in a way known as “soft deflation.”

“The 4-1/2 percent decline from its peak two years ago,” he noted, “occurred in a context of low unemployment — a welcome and unusual result.” in history.”

With high inflation already captured, Powell and other central bank officials preparing to lower their key interest rate in mid-September for the first time in more than four years. The Fed is more focused on supporting the labor market with the help of low interest rates than continuing to fight inflation.

Many consumers, on the other hand, are still very busy with today’s price situation.

“It’s really been a remarkable achievement, the way inflation is up, back, and close to target,” said Kristin Forbes, an MIT economist and former official at the United Kingdom’s central bank, the Bank of England.

“But from the point of view of the families, it has not been that successful,” he added. “Many have taken a big step in their incomes. Many feel that the basket of goods they buy has become too expensive.”

Two years ago, economists feared that the Fed’s rate hike — it ended up raising its benchmark interest rate above 5 percent to 23 years at the fastest pace in years forty – will cripple the economy and cause the loss of millions of jobs. After all, that’s what happened when the Fed under Chairman Paul Volcker sent its interest rate to nearly 20% in the early 1980s, ending the brutal recession. of inflation.

In fact, in Jackson Hole two years ago, Powell himself warned that using high interest rates to beat inflation “could bring some pain.”

However, now, according to the rate chosen by the Fed, inflation is 2.5%, not far above its target of 2%. And while the slow pace of hiring has caused some concern, the unemployment rate remains low at 4.3%, and the economy is growing at a brisk pace. solid 3% annual rate last quarter.

Although no Fed official will declare victory directly, some are content to defy the doom and gloom predictions.

“2023 was a historic year of low inflation,” said Austan Goolsbee, president of the Chicago Fed. “And there was no recession, and that never happened. So we’ll be studying the mechanics of how that happened for a long time. ”

Measures of consumer sentiment, however, show that three years of rising risk has dampened the outlook of many Americans. In addition, high mortgage rates, coupled with high housing prices, have caused many young workers to fear that homeownership is still out of reach.

Last month, consulting firm McKinsey said that 53% of consumers in its latest survey “still say rising prices and inflation are among their biggest concerns.” Analysts at McKinsey attributed the rising number to “inflation overhang” – the belief that it could take months, if not years, for consumers to adjust to sharply higher prices even if their incomes remain stable. you are equal.

Economists point to several reasons for the wide gap of opinion between economists and policymakers on the one hand and everyday consumers and workers on the other.

The first is that the Fed adjusts its interest rate policies to control inflation – the measure of price changes – rather than price levels themselves. So when inflation is rising, the central bank’s goal is to bring it back to a stable level rather than to reduce inflation. Fed policymakers expect interest rates to moderate and finally allow consumers to pay for higher prices.

“Central bankers think that even if inflation goes away from 2% for a while, as long as it comes back, that’s OK,” Forbes said. “But a period of inflation away from 2% can be very costly.”

Research by Stefanie Stantchevaa Harvard economist, and two of his colleagues found that the public’s view of inflation is very different from that of economists. Economists tend to think of inflation as a result of strong growth. They often attribute inflation to a “hot” economy: Low unemployment, strong job growth and rising wages allow businesses to raise prices significantly without losing profits. sales.

On the other hand, a study conducted by Stantcheva found that, average Americans “view inflation as completely negative and rarely as a sign of good economics or as a result of good progress.”

Respondents to his survey also said they believe inflation is caused by excessive government spending or greedy businesses. “They don’t believe that policy makers (the central bank) are facing business problems, such as reducing economic activity or increasing unemployment in order to control inflation.”

At the Jackson Hole conference, Andrew Bailey, the governor of the Bank of England, argued that central banks cannot guarantee that inflation will not occur – only that they will try to restore it. down when it happens.

The central bank’s test, Bailey said, “isn’t that we won’t have inflation. The government’s test is how, once you get hit by these shocks, you get it back on target.”

However, Forbes suggested that there are lessons to be learned from the inflation spike, including whether inflation has been allowed to stay high for too long. The Fed has been criticized for taking too long to start raising rates. Inflation began to rise in the spring of 2021. However, the Fed, under the false impression that higher prices would prove to be “temporary,” did not begin raising rates in until about a year later.

“Maybe we should think again … where we seem to be now: ‘As long as it comes back four to five years later, that’s fine,’ ” he said. “Maybe four to five years is too long.

“How much unemployment or recession should we be willing to accept to shorten the period when inflation is so high?”