The Washington PostDemocracy Dies in Darkness

Opinion The Powell Federal Reserve hasn’t won the inflation fight yet

Jerome H. Powell, chair of the Federal Reserve, in Stockholm on Jan. 10. (Reuters)
3 min

When Federal Reserve Chair Jerome H. Powell addresses the public Wednesday, he might be tempted to take a bow. Mr. Powell has been a steadying force through President Donald Trump’s trade wars and repeated threats to fire him, a once-in-a-century pandemic and, now, the worst inflation crisis in 40 years.

Many expected the economy to be in a recession by now, triggered by the interest rate hikes in the Fed’s aggressive inflation-fighting campaign. Instead, it has been remarkably resilient. Growth is solid, inflation has cooled markedly since June, more Americans are starting businesses, and unemployment is at historic lows.

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With inflation easing, calls are growing louder for the Fed to stop raising interest rates. While that is tempting, Mr. Powell cannot declare victory over inflation yet. Another rate increase is all but certain on Wednesday and Fed officials need to keep signaling they are still in a “hawkish” mode in which taming inflation is their sole objective.

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History is full of painful examples in which central banks gave up the inflation fight too soon. The United States’ experience in the 1970s is one such warning. Inflation appeared to be moderating twice during that decade, only to spike again because of energy crises. It’s nearly impossible to predict when large-scale shocks will rock the economy, but the memory of $5 gas remains fresh (even though it’s around $3.50 now). It is far worse to let up too soon and see inflation roar back than it is to stay tight until it is clear inflation is stamped out. The fact that lower-income workers are not yet facing layoffs underscores how robust the labor market remains and should also embolden the Fed to stay focused on inflation.

Some prominent voices, including former treasury secretary Lawrence H. Summers, are urging the Fed not to signal any further rate increases after Wednesday. They argue flexibility going forward is key. But to truly preserve its freedom to act, the Fed will have to continue talking tough. Investors are eager for any signs that the Fed is pausing rate hikes. Markets have already been rallying this year, largely on the belief that the Fed will end its tightening sooner than expected — and even start cutting rates by the end of the year. If markets continue rising on optimistic expectations about the Fed’s intentions, it would get only harder for the Fed to dash them, risking a painful market reaction. Unfortunately, Mr. Powell needs to push back.

For now, the Fed needs to keep talking tough on inflation and signaling more hikes. If the Fed determines that it can ease up later this year, it will be easy to lighten up then, exceeding expectations rather than confounding them.

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Members of the Editorial Board and areas of focus: Opinion Editor David Shipley; Deputy Opinion Editor Karen Tumulty; Associate Opinion Editor Stephen Stromberg (national politics and policy, legal affairs, energy, the environment, health care); Lee Hockstader (European affairs, based in Paris); David E. Hoffman (global public health); James Hohmann (domestic policy and electoral politics, including the White House, Congress and governors); Charles Lane (foreign affairs, national security, international economics); Heather Long (economics); Associate Editor Ruth Marcus; and Molly Roberts (technology and society).