The Fed Has Made a U.S. Recession Inevitable

U.S. Federal Reserve Chair Jerome Powell has made two ambitious assertions about the central bank’s management of the economy. In his latest news conference, he said that the Fed’s new, more inflation-tolerant monetary policy framework bears no responsibility for the recent sharp surge in consumer prices. Then, the following week, he cited three historical examples — the tightening cycles of 1964

I disagree with both.

The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable. Under the monetary policy framework, introduced in August 2020, the Fed is supposed to target average annual inflation of 2%, which means allowing for occasional overshoots to make up for previous shortfalls. Yet in the current recovery, the central bank translated this into a more specific commitment. It would not start to remove monetary stimulus until three conditions had been met: inflation had reached 2%; inflation was expected to persist for some time; and employment had reached the maximum level consistent with the 2% inflation target.

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