Comment: The Fed’s strategy is becoming clearer

Jerome Powell’s strategy is becoming clearer. The President of the Federal Reserve ignores signs of soaring inflation until people who have been watching economic developments from the sidelines for years come into wages. Powell’s motive is noble. He wants to pave the way back into the labor market for low-wage earners with a low level of education after this group was particularly hard hit by the pandemic crisis. He feels encouraged by experiences in late 2019, when the United States celebrated the lowest unemployment rate in fifty years, with labor force participation higher than in the previous ten years. The combination of expansive fiscal policy with Trump’s tax cut and government spending at a record high with a loose monetary policy was accompanied at the time by calls that the economy was running too hot. The rampant inflation can hardly be prevented. But it did not come, the inflation.

Their absence encouraged Powell and his colleagues to realign monetary policy. They saw that their idea of ​​full employment was wrong and that, under favorable conditions, people would return to the labor market who were no longer expected. In essence, the new monetary policy now says that the Fed will at times tolerate more inflation than the still applicable target of 2 percent, if this enables progress in the labor market and at the same time keeps long-term inflation expectations firmly anchored.

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