The Fed's new playbook for fighting inflation risks doing more harm than good, top economists at Bank of America, Deutsche Bank, and Morgan Stanley say
Five months after the pandemic locked down the US, the Fed unveiled a new policy framework for piloting the economy. Gone were its 2% inflation target and"full employment" goals.
That new playbook, as promising as its goals are, might be a mistake, the chief global economists of Bank of America, Deutsche Bank, and Morgan Stanley, as well as economists at the University of Chicago and the University of Wisconsin, said in a recent paper. Looking at inflation and employment for more- and less-advantaged groups, the team found that the balance between maximum employment and stable prices would be hard to achieve without serious risk.
Cooling inflation in a hot economy leaves the Fed with a"very difficult tradeoff," the economists said. Since inflation and unemploymenthad an inverse relationship, the Fed's efforts to ease price growth by quickly raising interest rates would require a"substantial increase in the unemployment rate," and with it, some backpedaling of the inclusive recovery.
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