The economic models of the past didn’t figure on a pandemic
The economic models of the past didn’t figure on a pandemic
The Federal Reserve is trying to figure out a way forward in setting monetary policy based on consumers’ hopes and anxieties about the economy as the pandemic wanes.
The Fed committee that sets interest rates will meet Tuesday and Wednesday to consider changes to its policy, news that investors, businesspeople and economic observers watch for.
But “ghosts of the past” — fears of inflation and old economic models — don’t apply to the current strange pandemic economy, said Aaron Klein, a senior fellow at the Brookings Institution.
“The Fed is in a difficult bind. And the Fed is going to have to decide whether or not to continue fighting the problems we face today or continue fighting the problems they faced in the 1970s,” Klein said.
Klein said many economic models assume that different aspects of the economy tend to move together in sync. But the inequalities of the pandemic and its unequal recovery are showing that’s not the case.
“COVID caused a fundamental shift in how we work and how we behave outside of work. There’s a lot out there that I don’t think it’s going to go back to the way it was,” said Patricia Buckley, managing director of economics at Deloitte.
Carola Binder, an associate professor of economics at Haverford College, said the Fed is acknowledging that by its slow and measured response to things like the sudden spike in inflation.
“I think that we need to have humility right now, as economists and as forecasters,” Binder said. “When there is uncertainty, there’s some value to kind of waiting and seeing what happens.”
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
