Fed Chairman Jerome Powell and his colleagues initially operated under the assumption that higher inflation was narrowly related to the COVID-19 pandemic, and that once virus cases started to decline, prices would stabilize too.
and his colleagues initially operated under the assumption that higher inflation was narrowly related to the COVID-19 pandemic, and that once virus cases started to decline, prices would stabilize too.
But the root cause of inflation was multi-pronged, with higher prices stemming from supply chain disruptions, high consumer demand, the Russian war in Ukraine and trillions in government spending that went directly into the pockets of Americans. When inflation did not fall along with virus cases – and once wages began rapidly rising – the Fed was forced to switch course.
At the same time, the former Fed head said the outcome of such a slow policy response could be a poor economic performance. Stagflation is the combination of economic stagnation and high inflation, characterized by soaring consumer prices as well as high unemployment. The phenomenon ravaged the U.S. economy in the 1970s and early 1980s, as spiking oil prices, rising unemployment and easy monetary policy pushed the consumer price index as high as 14.8% in 1980, forcing Fed policymakers to raise interest rates to nearly 20% that year.
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