In an excellent overview, the writer uses near-perfect automotive analogies to discuss the predicament the U.S. central bank faces, and all I could think of was this video captured during the 2011Tōhoku tsunami.
A guest post at FT Alphaville:
Last year, the Fed raced for inflation. This year, it will race against
inflation. The question now is how sharp the bend will be.
Edward Price, a former British economic official and current teacher of political economy at New York University’s Center for Global Affairs, looks at the perilous road ahead for a Federal Reserve trying to deflate the US economy without crashing markets.
Not so long ago, the Fed was worried. Why couldn’t it produce inflation at a measly 2 per cent?
Indeed in the summer of 2020, the world’s most important central bank was so worried that it unveiled a framework aimed at stirring price pressures and spurring job creation. The centrepiece was the Flexible Average Inflation Target, or FAIT. FAIT would give officials the wriggle room to run the economy hot, with inflation surging past its 2 per cent goal for an unspecified, but limited, period of time. Thus the US labour market would tighten. All while the Fed’s inflation-fighting credentials remained firmly intact.
The theory was that the past decade had shown that the US economy could tolerate far higher rates of employment without the risk of a debilitating spiral in wages and prices. So, as the pandemic shuttered firms, and jobs were lost, the Fed did the obvious thing. It embarked on a quest for inflation that consisted of rate cuts and unprecedented injections of liquidity into financial markets.Whoops. ...
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