Philip Jefferson, Speech: Discussion of the Paper, “Managing Disinflation”

Inflation – Referencing “Managing Disinflations” Paper

“The authors’ first takeaway, based on past disinflation episodes in the United States and abroad, is that policymakers should expect that disinflation will be costly in terms of foregone output or employment. They find that all 16 of the large policy-induced disinflations in the four advanced economies they study were associated with a recession.”

“It is also consistent with the authors’ argument that swift and relatively painless disinflations of the past were due to early and sharp policy interest rate increases.”

“The authors’ third takeaway from history is that easing monetary policy before the disinflation is complete, or easing by too much, is costly. My reading of this claim is that while central bankers might entertain hopes that they will directly see a dividend from early, forceful policy actions, historical experience suggests that they should not count on such a favorable outcome.”

“And, finally, they argue that policy needs to look ahead and act preemptively. While the authors do not present evidence to support this claim, it is an argument with which policymakers nearly always agree, in principle, but find difficult to execute, in practice.”

Fed Funds & Recession

“The authors’ policy takeaways fall into two classes. First, there are the conclusions that pertain to the current situation. They suggest that the unusually large and rapid tightening in policy in 2022 was good policy. … In addition, despite the rapid tightening to date, the authors contend that additional monetary policy tightening is likely to prove necessary to achieve 2 percent inflation by 2025 and is likely to lead to a mild recession.”

Inflation

“The point is that the inflationary forces impinging on the U.S. economy at present represent a complex mixture of temporary and more long-lasting elements that defy simple, parsimonious explanation.”

“The ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly.”

“The current situation is different from past episodes in at least four ways. First, the pandemic created unprecedented disruptions to global supply chains. Second, the pandemic is having a long-lasting effect on labor force participation rates. Third, the credibility of the central bank is higher now than it was in the 1960s and 1970s. Fourth and most importantly, unlike in the late 1960s and 1970s, the Federal Reserve is addressing the outbreak in inflation promptly and forcefully to maintain that credibility and to preserve the “well anchored” property of long-term inflation expectations.”