U.S. Economy Is Evolving. So Should the Fed.
In light of surprising data on inflation and jobs, adhering to a rigid framework increases the risk of a policy mistake, a market accident or both.
Now is not the time for rigidity.
Photographer: Susan Walsh-pool/Getty Images
The two big macroeconomic data surprises over the past few days should encourage greater humility and open-mindedness in the way policy makers, economists and Wall Street analyze the U.S. economy. If they don’t, they will significantly increase the risk that a policy mistake, a market accident or both will derail what should and needs to be a long period of high, inclusive and durable growth.
Friday’s shockingly disappointing jobs number and Wednesday’s much greater-than-expected surge in inflation have more in common than just embarrassing many economic forecasters. They also suggest — and I use suggest because it would be foolish to draw any firm conclusions based on a single month’s data — that widespread supply rigidities are accompanying what, according to the overwhelming majority of other macro and micro data, is a big step up in the scale and scope of aggregate demand. Indeed, the two are linked. Historically, economists have found it difficult to predict structural changes in the supply side of the economy, especially when the demand side is incredibly fluid.