WASHINGTON (AP) — When Jerome Powell delivered a highly publicized speech last month, the Federal Reserve chairman came closest to declaring that the surge in inflation that has gripped the country for three painful years is now essentially over.
And that’s not all. Powell says the Fed’s high interest rates have helped achieve this goal without causing the widely predicted recession and high unemployment.
Yet most Americans are in no mood to celebrate falling inflation in the face of the Fed’s high borrowing rates. While consumer sentiment is slowly improving, a majority of Americans in some surveys still complain about high prices, as the costs of necessities like food, gasoline and housing remain far higher than they were before the pandemic struck in 2020.
The relatively gloomy public mood poses challenges for Vice President Kamala Harris, who is seeking to succeed President Joe Biden. Despite falling inflation and strong job growth, many voters say they are dissatisfied with the Biden-Harris administration’s economic record, and particularly frustrated by high prices.
This disparity highlights a striking gap between how economists and policymakers assess the economy’s recent years and how many ordinary Americans do.
In his speech last month at an annual economic symposium in Jackson Hole, Wyoming, Powell highlighted how the Fed’s sharp rate hikes have been more successful than most economists predicted in taming inflation without hitting the economy — a notoriously difficult feat known as a “soft landing.”
“The 4.5 percentage point decline in inflation from its peak two years ago,” he noted, “has occurred against a backdrop of low unemployment – a welcome and historically unusual outcome.”
With high inflation now under control, Powell and other central bank officials are preparing to cut their benchmark interest rate in mid-September for the first time in more than four years. The Fed is now more focused on sustaining the jobs market through lower interest rates than on continuing to fight inflation.
On the other hand, many consumers are still primarily concerned about current price levels.
“It’s really been a remarkable success, the way inflation has gone up, come back and is around target,” said Kristin Forbes, an economist at MIT and former head of the U.K.’s central bank, the Bank of England.
“But from the household perspective, it has not been a success,” she added. “Many have seen their wages fall sharply. Many of them feel that the basket of products they buy is now much more expensive.”
Two years ago, economists worried that the Fed’s steady rate hikes—which ultimately raised its benchmark rate by more than 5 percentage points to a 23-year high, the fastest pace in four decades—would weigh on the economy and cause millions of job losses. After all, that’s what happened when the Fed, under Paul Volcker, raised its benchmark rate to nearly 20% in the early 1980s, putting an end to a runaway inflation.
In fact, at Jackson Hole two years ago, Powell himself warned that resorting to high interest rates to counter rising inflation “would be painful.”
But by the Fed’s preferred measure, inflation is now running at 2.5%, not much above its 2% target. And while there are some concerns about slowing hiring, the unemployment rate remains low at 4.3%, and the economy grew at a solid 3% annual pace in the latest quarter.
While no Fed official will claim victory, some enjoy defying pessimistic predictions.
“2023 was a historic year in terms of declining inflation,” said Austan Goolsbee, president of the Chicago Fed. “And there was no recession, which is unprecedented. So we’re going to be studying for a long time the mechanisms that led to this situation.”
Consumer confidence indicators, however, indicate that three years of inflation have dimmed the outlook for many Americans. In addition, high mortgage rates and high home prices have led many young workers to worry that homeownership is increasingly out of reach.
Last month, consulting firm McKinsey reported that 53 percent of consumers in its latest survey “continue to be concerned about rising prices and inflation.” McKinsey analysts attributed the increase to “inflation risk,” or the belief that it can take months or even years for consumers to emotionally adjust to much higher prices, even if their wages keep pace.
Economists cite several reasons for the wide gap in perception between economists and policy makers on the one hand, and consumers and workers on the other.
The first is that the Fed adjusts its interest rate policy to manage inflation (the rate of price change) rather than price levels themselves. So when inflation spikes, the central bank’s goal is to bring it back to a sustainable level rather than to reverse the price increase. Fed officials expect average wages to catch up and eventually allow consumers to pay the higher prices.
“Central banks believe that even if inflation moves away from 2% for a while, as long as it comes back, everything is fine,” Forbes said. “But the time that inflation moves away from 2% can have a significant cost.”
According to a study by Harvard economist Stefanie Stantcheva and two colleagues, most people have a very different view than economists. Economists tend to view inflation as a consequence of strong growth. They often describe it as the result of an “overheated” economy: low unemployment, strong job growth, and rising wages encourage companies to raise prices sharply without necessarily losing sales.
In contrast, according to a study by Stantcheva, ordinary Americans “view inflation as an unambiguously bad thing and very rarely as a sign of a good economy or as the result of positive developments.”
Respondents also said inflation was caused by excessive government spending or corporate greed. “They don’t believe that (central bank) policymakers have to make trade-offs, such as reducing economic activity or increasing unemployment, to control inflation.”
At the Jackson Hole conference, Bank of England Governor Andrew Bailey said that central banks cannot guarantee that high inflation will never occur – only that they will try to bring it down when it does.
“The test of a central bank is not whether we will never have inflation, but whether it is able, once hit by these shocks, to bring inflation back to its target,” Bailey said.
Forbes nonetheless suggested that there are lessons to be learned from the inflation spike, including whether inflation may have stayed too high for too long. The Fed has long been criticized for being slow to raise its policy rate. Inflation first spiked in the spring of 2021. Yet the Fed, mistakenly believing that the high inflation would be “transitory,” didn’t start raising rates until nearly a year later.
“Maybe we should rethink the current situation: As long as it comes back four to five years later, it’s good,” she said. “Maybe four to five years is too long.
“How much unemployment or slower growth should we be willing to accept to reduce the period during which inflation is too high?”
Chris Rugaber covers the economy and the Federal Reserve
nbcnews
