Economist and former Obama adviser Jason Furman made a prescient warning against overstimulating the economy with too much pandemic aid. He spoke with jenwieczner about skyrocketing inflation, what the Fed needs to do, and what might happen next
Jason Furman. Photo: Drew Angerer/Bloomberg via Getty Images Months before much of the economic establishment took the prospect of perilously high inflation seriously, Jason Furman made a prescient warning against overstimulating the economy with too much pandemic aid. Now, with prices rising at the fastest pace in 41 years, the Federal Reserve has raised interest rates by half a percentage point — the largest hike since the turn of the millennium.
Inflation has gone higher for two reasons. One is the underlying momentum in the economy and the much stronger labor market, and the second is bad luck related to Putin’s invasion of Ukraine. At this point, the Fed can’t afford to ignore the underlying trend. And it also can’t afford to ignore the bad luck.The Fed got behind the curve, but it is catching up quickly and trying to get interest rates up to a normal level or at least a neutral level.
Not in the next year, for two reasons. One is they’re just raising rates to neutral. I don’t think that raising interest rates to 2 percent or 3 percent is a cause for recession. And two, monetary policy affects the economy with a lag of about a year. A year and a half or two and a half years from now, that’s where I think it’s possible that the Fed’s going to move so far so fast that it risks a recession. But for the next year, I’m not that worried.
As for what it means, it depends a lot on what’s winning the race: wages or prices. Right now, prices are winning, and workers are falling further and further behind. That could change, and it could be that we have high inflation but even faster wage growth. That would be a different story, but that’s not where we are yet.It’s hard to imagine how we get back to 2 or even 3 percent without a recession. There are very few examples in history.
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