Whatever the exact explanation, some economists are convinced that the old consensus—you can’t stop inflation without a recession—has turned out to be wrong. The question now is whether the Fed will learn that happy lesson. (As one of 12 members of the Federal Open Market Committee, which convenes regularly to vote on interest rates, Goolsbee has a direct role to play in providing an answer.) At its most recent meeting in September, the Fed signaled that it will likely increase rates again before the end of 2023 and keep them at that level—the highest in 20 years—well into 2024. Higher interest rates make it more expensive for consumers to buy a home or car and for businesses to make investments, which, in turn, is supposed to reduce hiring, blunt wage growth, and depress spending. The entire point is to cool prices by grinding the economy to a halt. So far, the post-pandemic economy has been resilient, but there’s a limit to how long rates can go up—and stay up—before their full pain is felt.
Of course, there are risks in the other direction as well. An external shock—such as spiking oil prices in response to war in the Middle East—could send inflation shooting up again. But some economists find that possibility far less threatening than an overcorrection. Mark Zandi, the chief economist at Moody’s Analytics, told me an overcorrection is “the No. 1 risk I worry about.” Justin Wolfers, an economics professor at the University of Michigan, refers to it as the fear “that keeps me up at night.”
The economy, in other words, appears to be gliding smoothly toward the kind of “soft landing” that until recently seemed unimaginable. But if the Fed continues to raise interest rates, or just keeps them too high for too long, it risks driving the plane off the runway. “Paul Volcker was my mentor,” Goolsbee told me. “But what people have to understand is that this isn’t the 1970s.”
The Fed might not be able to so easily suppress a half century’s worth of inflation-fighting instincts. Although inflation has come down considerably in recent months, it is currently running at about 3 or 4 percent, depending which measure you use, which is still above the Fed’s 2 percent target. Everyone would prefer to avoid a recession, but some officials think that this “last mile” of inflation will never come under control as long as the economy maintains its current strength. As Fed Chair Jerome H. Powell put it in a speech yesterday, “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”