Rapid Inflation, Lower Employment: How the U.S. Pandemic Response Measures Up

“It’s unsustainably hot,” Jerome H. Powell, the Fed chair, said of the job market during an event on April 21. “It’s our job to get it to a better place where supply and demand are closer together.”

America’s heady pay gains could mean that the Fed has to react more aggressively to slow down the economy. The central bank is trying to tame inflation by lifting interest rates in a bid to make money more expensive to borrow, which can slow spending and cool off economic conditions.

But if the Fed has to raise rates to high levels to restore economic calm, it could touch off a recession that pushes the unemployment rate higher. Mr. Powell and his colleagues have said they hope they can manage to land the economy softly without inducing that kind of pain — but they acknowledge that a downturn is a risk.

Ultimately, the legacy of America’s big relief programs may depend on what happens in the months ahead. If inflation moderates without painful action by the Fed — something some economists still believe is at least possible if the pandemic fades, supply chains normalize and workers return to the job market — then the brief period of rapid price gains may end up looking like a relatively small price to pay for a strong economic recovery that in some ways outstripped those staged abroad.

But if central bankers decide they need to take more drastic steps, resulting in a recession, it could reverse some of the recent progress — and the consequences are likely to be worse for low-wage workers who have experienced the strongest job and wage gains.

The war in Ukraine could complicate attempts to judge America’s performance against its global peers. Economic growth in Europe had been accelerating late last year, but the Russian invasion — and the spike in fuel costs that came with it — is threatening to derail the recovery there. The United States could also face consequences, but is comparatively insulated from the Russian and Ukrainian economies.

“Europe was doing well and I was very optimistic prior to the war,” said Gian Maria Milesi-Ferretti, an economist at the Brookings Institution who has studied the recoveries in the United States and Europe. “But now the war shock is completely asymmetric between the U.S. and Europe.”

Article source: https://www.nytimes.com/2022/04/25/business/economy/us-global-inflation-response.html