The Fed's Mind Control
Bloomberg Businessweek|January 24, 2022
The idea that monetary policy shapes inflation expectations is about to get road-tested
Matthew Boesler

At his Jan. 11 hearing for confirmation to another four years at the helm of the Federal Reserve, Jerome Powell told the Senate Banking Committee that tighter monetary policy “really should not have negative effects on the employment market.”

That assertion, echoed by Powell’s prospective No. 2, Lael Brainard, in her own appearance before Congress the same week, puts the Fed’s policymakers at the center of a debate among economists that stretches back decades about the link between interest rates, employment, and inflation—in other words, how the central bank’s toolkit actually works and, for that matter, what determines the course of inflation itself.

Fed officials are walking a tightrope as they lay the groundwork for a series of interest-rate increases that could begin as soon as March. They’re heeding calls to quell the fastest consumer price inflation in 40 years while at the same time trying to avoid the appearance of penalizing workers at a moment when they’re enjoying historic bargaining power, widely seen as long overdue.

The inflation expectations doctrine that’s dominated mainstream economics since the 1980s offers one potential way to square that circle. The idea is that if a central bank can convince businesses and consumers it will maintain low and stable inflation, then it won’t have to do much else. That’s because expectations about where prices are headed are thought to be a major driver of inflation itself. If workers don’t anticipate higher inflation, they won’t demand bigger wage increases to make up for their lost purchasing power. Nor will they rush to go out and buy things because they expect them to increase in price, leading to a self-perpetuating upward spiral.

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM BLOOMBERG BUSINESSWEEKView All

Bet On It

A Silicon Valley-backed startup wants to bring Wall Street-style trading to the outcome of events. Some regulators say that’s a terrible idea

10+ mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

You're Browsing All Wrong

A startup wants to discard the standard formula for the web browser

7 mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

Killer Heat Is Here

The record temperatures ravaging India are a warning of global catastrophes to come

4 mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

Opening the Spigot

Conservatives want to limit social media companies’ power to control content

5 mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

Expanding Access to Mind Expansion

Companies offer guided drug trips on jungle retreats, at city clinics, and in your living room

4 mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

Europe's Travel Rebound Wobbles

A staffing crisis at airlines, airports, and even the Chunnel left some operators overwhelmed

4 mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

Better-Odds Babies

Genetic testing companies promise they can predict an embryo’s probable future health. Some parents don’t want to stop there

10+ mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

Are We Still Doing Scooters?

Lime says people are scooting more than ever, but providing urban transit is a hard way to make unicorn-level profits

2 mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

"You Know What's Cool?"

Facebook has spent a decade successfully ripping off its newer, hotter rivals. But this time, it tried to copy TikTok and blew up Instagram instead

10+ mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)

Pivoting to Troll

Elon Musk’s incessant posting may do wonders for his ego and clout in right-wing circles, but it has destroyed value pretty much everywhere else

5 mins read
Bloomberg Businessweek
May 30 - June 06, 2022 (Double Issue)
RELATED STORIES

GOOGLE'S RUSSIAN BUSINESS PLANS TO FILE FOR BANKRUPTCY

Google says its Russian subsidiary is planning to file for bankruptcy because it can’t pay staff and suppliers.

1 min read
Techlife News
May 21, 2022

4 Ways to Protect Your Small Business From Cyberattacks

Since the beginning of the COVID-19 pandemic, small businesses have quickly adopted remote working and transitioned to new technologies, such as contactless payments and online ordering.

4 mins read
Techlife News
May 14, 2022

WHY A WEALTH TAX IS A BAD IDEA

Billionaires are better at figuring out what to do with their money than the government will ever be.

5 mins read
Reason magazine
June 2022

FEDS: THOUSANDS MAY HAVE STUDENT DEBT THAT SHOULD BE ERASED

Record-keeping failures by the federal government may have left thousands of Americans saddled with student debt that should have been automatically canceled through a benefit for low-income borrowers, according to a new federal study.

4 mins read
Techlife News
April 23, 2022

A KEY INFLATION GAUGE SETS 40-YEAR HIGH AS GAS AND FOOD SOAR

An inflation gauge that is closely monitored by the Federal Reserve jumped 6.4% in February compared with a year ago, with sharply higher prices for food, gasoline and other necessities squeezing Americans’ finances.

3 mins read
Techlife News
April 02, 2022

IN YOUR DEBT: FORGET THE FED, PAY OFF YOUR CREDIT CARD DEBT

The cost of everything keeps creeping up.

3 mins read
Techlife News
April 02, 2022

Efficiency Angel

Germany created Blue Angel, the world’s first eco-label for software, back in 2000. The methodology behind Blue Angel could serve as a model for other countries as governments turn their attention to the environmental impact of software.

5 mins read
Linux Magazine
#258/May 2022: Clean IT

WHAT TO KNOW BEFORE YOUR BUSINESS ADDS BUY NOW, PAY LATER

“Buy now, pay later” is becoming common at large retailers like Target, Ikea and Macy’s. More and more small-business owners are allowing their customers the ability to pay in installments, too.

4 mins read
Techlife News
March 26, 2022

POWELL: DIGITAL CURRENCIES WILL REQUIRE NEW REGULATIONS

Federal Reserve Chair Jerome Powell said new forms of digital money such as cryptocurrencies and stablecoins present risks to the U.S. financial system and will require new rules to protect consumers.

2 mins read
AppleMagazine
March 25, 2022

IS HIGH INFLATION THE NEW NORMAL?

ECONOMICS

3 mins read
Reason magazine
April 2022