Divided Public Believed Enough in Fed to Avoid a Recession
The central bank’s reservoir of credibility has allowed it to cut inflation without tipping the economy into a downturn.
Trustworthy enough.
Photographer: Alex Wong/Getty Images
Everyone can be happy about the recently reported decline in the US inflation rate, but how and why did it fall so quickly without causing a recession on the way down? Among the plausible hypotheses, there seems to be a clear winner — the transition was conducted with a high degree of credibility from the Federal Reserve and the government.
One hypothesis is that inflation came down quickly because of the unwinding of Covid supply chain problems and adjustment to the Ukraine war. In this view, prices were much higher at first because supply was stifled. But as markets adjusted and learned how to work around the new obstacles, supply found new channels, more goods came on the market, and prices stopped rising or fell. Nothing in that story suggests that a recession ought to take place.