March 28, 2024

The Economy Is Strong and Inflation Is Low. That’s What Worries the Fed.

John Williams, the president of the Federal Reserve Bank of New York, has warned that could unleash a dangerous feedback loop. During a recession, central banks won’t be able to cut rates by enough to ever coax inflation back up to target, and expectations will fall further with each passing business cycle.

“The facts have changed, and so it is time our change our minds also,” he said in a recent speech, urging a global rethink of economic policy.

As part of the Fed’s strategy review this year, top officials will meet in Chicago next month to discuss how monetary policy works — and how it should. Mr. Powell has described the goal as an evolution, rather than a revolution.

Whatever approach they take to lifting inflation, officials will have to convince the public that they mean it. Inflation expectations are slipping among both economic forecasters and consumers, based on two recent Fed surveys. Just 56 percent of Fed watchers thought policymakers had the tools to achieve their target, down from 60 percent a year earlier, according to a survey run by the research firm MacroPolicy Perspectives.

If price increases get stuck in low gear permanently, consequences could reverberate from the Fed’s Marriner S. Eccles Building in Washington to the dining scene in Asheville.

In inflation’s absence, Ms. Roy from Biscuit Head is seeing her fellow restaurateurs make tough choices. They can’t charge enough to cover higher wages, because their competitors are holding prices fairly steady. That leads to understaffing, and has caused some owners to give up the game altogether.

“If you’re perceived as being too expensive, people aren’t going to want to come,” Ms. Roy said. “It really is a balancing act.”

Article source: https://www.nytimes.com/2019/05/21/business/economy/economy-inflation-fed.html?partner=rss&emc=rss

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