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Take the boot off

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A strong case that the Federal Reserve should stop raising interest rates for the time being:

Ultimately though, the question of whether the Federal Reserve should prioritize avoiding a recession over preempting resurgent inflation cannot be settled by data alone. It all depends on the relative weight one places on low price growth versus high employment.

In my view, avoiding a sharp increase in joblessness is far more important than bringing inflation back down to the Fed’s desired 2 percent level. This is true for reasons both moral and economic.

Recessions concentrate economic pain on those segments of the labor force least equipped to comfortably weather it: lower-income, low-skill workers are disproportionately likely to lose their market incomes in a downturn, even as they are disproportionately unlikely to have a cushion of savings to fall back on. Elevated prices, by contrast, diffuse the costs of economic adjustment across the broad population.

This does not mean that high and accelerating inflation is preferable to a mild recession, since the former is economically and socially destabilizing. But the same cannot be said of, say, a stable rate of 4 percent of inflation. Thus, if one is committed to mitigating economic inequality, then an above-target inflation rate is preferable to a recession.

But even if one is an “anti-woke” inegalitarian, there remains a general economic case for prioritizing continuous expansion over returning to 2 percent inflation. Negative growth makes our society as a whole poorer. And recessions can weigh on the economy’s productive capacity for a long time after they’re through. The U.S. economy never returned to its pre-crash trajectory after the 2008 crisis. And the COVID recessions seem to have accelerated the boomer generation’s exit from the labor force, with many older workers opting for early retirement instead of seeking new jobs, thereby reducing America’s labor supply and growth potential.

On the other side of the ledger, the Federal Reserve’s 2 percent inflation target is entirely arbitrary. There is little empirical evidence to suggest that 4 percent inflation yields worse long-term economic outcomes than 2 percent. For much of the past decade, many eminent mainstream economists have implored the Fed to raise its inflation target. Their argument centered on the notion that somewhat higher inflation would yield higher nominal interest rates and thus more room for the central bank to reduce rates in the event of a downturn before hitting the zero percent lower bound.

Prices are clearly coming down; increasing unemployment and risking a serious recession to keep inflation at an arbitrary target is a value choice, and a bad one.

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