When Jerome Powell delivered a high-profile speech last month, the Federal Reserve chair came the closest he ever had to declaring that the inflation surge that gripped the nation for three painful years was now essentially defeated.
And not only that. The Fed’s high interest rates, Powell said, had managed to achieve that goal without causing a widely predicted recession and high unemployment.
Yet most Americans are not in the same celebratory mood about the plummeting of inflation in the face of the high borrowing rates the Fed engineered. Though consumer sentiment is slowly rising, a majority of Americans in some surveys still complain about elevated prices, given that the costs of such necessities as food, gas and housing remain far above where they were before the pandemic erupted in 2020.
The relatively sour mood of the public is creating challenges for Vice President Kamala Harris as she seeks to succeed President Joe Biden. Despite the fall of inflation and strong job growth, many voters say they’re dissatisfied with the Biden-Harris administration’s economic record — and especially frustrated by high prices.
That disparity points to a striking gap between how economists and policymakers assess the past several years of the economy and how many ordinary Americans do.
In his remarks last month, given at an annual economic symposium in Jackson Hole, Wyoming, Powell underscored how the Fed’s sharp rate hikes succeeded much more than most economists had predicted in taming inflation without hammering the economy — a notoriously difficult feat known as a “soft landing.”
“Some argued that getting inflation under control would require a recession and a lengthy period of high unemployment,” Powell said.
Ultimately, though, he noted, “the 4-1/2 percentage point decline in inflation from its peak two years ago has occurred in a context of low unemployment — a welcome and historically unusual result.”
With high inflation now essentially conquered, Powell and other central bank officials are preparing to cut their key interest rate in mid-September for the first time in more than four years. The Fed is becoming more focused on sustaining the job market with the help of lower interest rates than on continuing to fight inflation.
Many consumers, by contrast, are still preoccupied most by today’s price levels.
“From the viewpoint of economists, central bankers, how we think about inflation, it really has been a remarkable success, how inflation went up, has come back, and is around the target,” said Kristin Forbes, an economist at MIT and a former official at the United Kingdom’s central bank, the Bank of England.
“But from the viewpoint of households, it has not been so successful,” she added. “Many have taken a big hit to their wages. Many of them feel like the basket of goods they buy is now much more expensive.”
Two years ago, economists feared that the Fed’s ongoing rate hikes — it ultimately raised its benchmark rate more than 5 percentage points to a 23-year high in the fastest pace in four decades — would hammer the economy and cause millions of job losses. After all, that’s what happened when the Fed under Chair Paul Volcker sent its benchmark rate to nearly 20% in the early 1980s, ultimately throttling a brutal inflationary spell.
In fact, at Jackson Hole two years ago, Powell himself warned that using high interest rates to defeat the inflation spike “would bring some pain to households and businesses.”
Yet now, according to the Fed’s preferred measure, inflation is 2.5%, not far above its 2% target. And while a weaker pace of hiring has caused some concerns, the unemployment rate is at a still-low 4.3%, and the economy expanded at a solid 3% annual rate last quarter.
While no Fed official will outright declare victory, some take satisfaction in defying the predictions of doom and gloom.
“2023 was a historic year for inflation falling,” said Austan Goolsbee, president of the Chicago Fed. “And there wasn’t a recession, and that’s unprecedented. And so we will be studying the mechanics of how that happened for a long time.”
Measures of consumer sentiment, though, indicate that three years of hurtful inflation have dimmed many Americans’ outlook. In addition, high loan rates, along with elevated housing prices, have led many young workers to fear that homeownership is increasingly out of reach.
Last month, the consulting firm McKinsey said that 53% of consumers in its most recent survey “still say that rising prices and inflation are among their concerns.” McKinsey’s analysts attributed the escalated figure to “an ‘inflation overhang.” That’s the belief among analysts that it can take months, if not years, for consumers to adjust emotionally to a much higher level of prices even if their pay is keeping pace.
Economists point to several reasons for the wide gap in perceptions between economists and policymakers on the one hand and everyday consumers and workers on the other.
The first is that the Fed tailors its interest rate policies to manage inflation — the rate of price changes — rather than price levels themselves. So when inflation spikes, the central bank’s goal is to return it to a sustainable level, currently defined as 2%, rather than to reverse the price increases. The Fed’s policymakers expect average wages to catch up and eventually to allow consumers to afford the higher prices.
“Central bankers think even if inflation gets away from 2% for a period, as long as it comes back, that’s fine,” Forbes said. “Victory, mission accomplished. But the amount of time inflation is away from 2% can have a major cost.”
Research by Stefanie Stantcheva, a Harvard economist, and two colleagues found that most people’s views of inflation are very different from those of economists. Economists in general are more likely to regard inflation as a consequence of strong growth. They often describe inflation as a result of an “overheating” economy: Low unemployment, strong job growth and rising wages lead businesses to sharply increase prices without necessarily losing sales.
By contrast, a survey by Stantcheva found, ordinary Americans “view inflation as an unambiguously bad thing and very rarely as a sign of a good economy or as a byproduct of positive developments.”
Her survey respondents also said they believed that inflation stems from excessive government spending or greedy businesses. They “do not believe that (central bank) policymakers face trade-offs, such as having to reduce economic activity or increase unemployment to control inflation.”
As a result, few consumers probably worried about the potential for a downturn as a result of the Fed’s rate hikes. One opinion survey, in fact, found that many consumers believed, incorrectly, that the economy was in a recession because inflation was so high.
At the Jackson Hole conference, Andrew Bailey, governor of the Bank of England, argued that central banks cannot guarantee that high inflation will never appear — only that they will try to drive it back down when it does.
“I get this question quite often in Parliament,” Bailey said. “People say, ‘Well you failed to control inflation.’ I said no.”
The test of a central bank, he continued, “is not that we will never have inflation. The test of the regime is how well, once you get hit by these shocks, you bring it back to target.”
Still, Forbes suggested that there are lessons to be learned from the post-COVID inflation spike, including whether inflation was allowed to stay too high for too long, both in the U.S. and the U.K. The Fed has long been criticized for having taken too long to start raising its benchmark rate. Inflation first spiked in the spring of 2021. Yet the Fed, under the mistaken impression that high inflation would prove “transitory,” didn’t begin raising rates until nearly a year later.
“Maybe should we rethink … where we seem to be now: ‘As long as it comes back four to five years later, that’s fine,’ ” she said. “Maybe four to five years is too long.
“How much unemployment or slowdown in growth should we be willing to accept to shorten the length of time that inflation is too high?”
