The trade-off between bringing down inflation and harming growth will come back with a vengeance.
Economists did not believe it was possible, but they’ve been wrong a lot lately, and in their defense it has only ever happened once (or maybe twice) before: We may be witnessing that rare achievement known as a soft landing. The US Federal Reserve’s latest forecast expects the inflation rate to slide back down to 2% without much job loss or economic slowdown.
But before we celebrate this bravura monetary performance, or decide unemployment and growth aren’t sensitive to inflation or interest rates after all, allow me to offer two observations, one looking backward and one forward. First, the last few years have been highly unusual. Second, this year will mark the end of the free-lunch economy.
The post-pandemic economy was marked by several unlikely factors. Shortages coming out of the pandemic sparked inflation, which was then exacerbated by unnecessarily expansionary monetary and fiscal policy. Just as the economy was poised to recover, in other words, policymakers gave it rocket fuel.
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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