Why Jerome Powell and the Fed Should Ignore the Inflation Hawks

After more than a year of unprecedented dislocation, there is good news for America’s workers. Job openings are at record levels, and wages are increasing. Last week, Amazon, the country’s second-biggest private-sector employer, announced that it is raising the pay for more than half a million of the company’s employees and offering signing bonuses of a thousand dollars to some new hires. McDonald’s has said that it will increase hourly wages at its company-owned outlets by about ten per cent. Other big employers, including Walmart and Chipotle, are also introducing pay hikes. Figures from the Labor Department confirm the upward trend. Between March, 2020, and March, 2021, inflation-adjusted average weekly earnings in the private sector rose by 3.9 per cent. These wage gains continued into April, when average hourly earnings rose another twenty-one cents, to $30.17. “The data for April suggest that the rising demand for labor associated with the recovery from the pandemic may have put upward pressure on wages,” the Labor Department said, in its latest employment report.

After many decades of wage stagnation, this is an encouraging development, but it has been overshadowed by fears of inflation and a possible labor shortage. The employment report, which was released a couple of weeks ago, also showed a surprising decline in job growth, which Republicans blamed on the Biden Administration’s decision to extend enhanced unemployment benefits. Last week, the Commerce Department reported that the Consumer Price Index rose by 0.8 per cent in April, which boosted the twelve-month inflation rate to 4.2 per cent—the highest level since 2008. “I was on the worried side about inflation and it’s all moved much faster, much sooner than I had predicted,” the economist Lawrence H. Summers, a former Treasury Secretary and adviser to President Obama, said on Twitter on Friday. Many other economists, including President Biden’s top advisers, insist that the inflation spike is a temporary result of bottlenecks associated with the pandemic, such as a shortage of used cars for sale. In April, the price of secondhand vehicles shot up by about ten per cent, and this alone accounted for around a third of the rise in the so-called “core C.P.I.,” which is the bit that policymakers monitor most closely. As the economy recovers, “there’s going to be some choppiness,” Cecilia Rouse, the chair of the White House Council of Economic Advisers, said at a press briefing on Friday.

Caught in the middle of this debate is the Federal Reserve and its chairman, Jerome Powell. Ever since the pandemic began, the central bank has been pouring cash into the economy and keeping short-term interest rates close to zero. It has also introduced an important policy change unrelated to the coronavirus. In its traditional role as the institutional guardian of stable prices and the protector of the investor class, the Fed has long acted preëmptively on inflation, raising interest rates if analysts believed that the target rate of inflation—currently two per cent—was in danger of being breached. (Most recently, the central bank took this step between 2015 and 2018.) Last August, though, the Fed adopted a new policy: it would allow inflation to rise above the target for a time—if officials believed that the rise was a temporary one. Work on this new approach began two years before the pandemic, but the reopening of the economy has presented the Fed with its first significant test. In a speech after the latest inflation figures were released, Richard Clarida, Powell’s deputy, described the price spike as “transitory,” and said that “this is not the time” for the central bank to consider acting to counter inflation.

This week, the Fed’s policymakers are scheduled to meet. At the press conference afterward, reporters are sure to press Powell about inflation fears. Most likely, Powell will reaffirm the Fed’s new…