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The Fed looks for a soft landing

Can Jerome Powell bring inflation under control?

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In his first term, the Federal Reserve's chairman, Jerome Powell, deftly navigated Donald Trump's presidency and "the onset of a global pandemic," said John Cassidy in The New Yorker. "His second term may well turn out to be an even bigger challenge." So far, many of the choices made by the central bank have been prescient. The Fed's decision, early in the pandemic, "to cut short-term interest rates to zero and pump more than a hundred billion freshly minted dollars into the bond markets every month has succeeded in getting the economy through some very dark times." Now, with inflation far above predictions, Powell has turned more hawkish, trying to avoid a spiral of increasing wages and prices. But if "Omicron proves more virulent than Delta, it could have even bigger effects on the economy," making it difficult to pull the Fed's support. Powell must perform a feat that eluded two of his predecessors, Alan Greenspan and Ben Bernanke: engineering "a soft landing for the economy without precipitating a financial crash or a recession."

Four weeks after setting in motion "carefully telegraphed plans to gradually wind down" its bond-buying stimulus program, the Fed already wants to accelerate the process, said Nick Timiraos in The Wall Street Journal. That suggests the Fed is focused "more on restraining inflation and less on encouraging employment." It didn't have to be this way, said Mohamed El-Erian in Bloomberg. Backed by Powell's repeated assurances that inflation was temporary, the Fed continued with pandemic relief programs "at a time when the economy was doing just fine, the housing market was red-hot, and the liquidity-fueled 'everything rally' was showing growing signs of excessive risktaking." So Powell is forced to slam on the brakes, exposing the economy to "a higher risk of an unnecessary, Fed-induced slowdown."

Covid still has a big say in where the economy is headed, said Catherine Rampell in The Washington Post. The nation's employers added just 210,000 jobs in November, missing forecasts by a wide margin. Wages are rising and there are plenty of jobs available. But Americans are still deeply affected by COVID, which is intermittently closing down schools and child care centers, a reason why more women than men remain on the sidelines. The emergence of Omicron could lead to "more worker absences, withdrawals from the labor force, and temporary shutterings of schools." Yet again, the key to solving our economic issues is "solving the public health one first."

One worry about Omicron is that it "could exacerbate companies' supply-chain and hiring problems, pushing up prices as a result," said Justin Lahart in The Wall Street Journal. That would make for an ugly combination of inflation and economic slowdown. The difference between Omicron and earlier Covid waves, though, is that it's not likely it will trigger "a fourth round of stimulus payments." If Omicron makes Americans less willing to spend, it might actually help tame inflation and ease the pressures that bedevil Powell and the Fed.

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.

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