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Economics

To Tame Inflation, the Fed Needs to Get Into Your Head

The theory that expectations are a key driver of price increases will be tested in 2022.

relates to To Tame Inflation, the Fed Needs to Get Into Your Head
Illustration: Felix Decombat for Bloomberg Businessweek

At his Jan. 11 hearing for confirmation to another four years at the helm of the Federal Reserve, Jerome Powell told the Senate Banking Committee that tighter monetary policy “really should not have negative effects on the employment market.”

That assertion, echoed by Powell’s prospective No. 2, Lael Brainard, in her own appearance before Congress the same week, puts the Fed’s policymakers at the center of a debate among economists that stretches back decades about the link between interest rates, employment, and inflation—in other words, how the central bank’s toolkit actually works and, for that matter, what determines the course of inflation itself.