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Grim forecasts from economists had predicted that as the Federal Reserve jacked up its benchmark rate ever higher, consumers and businesses would curb spending, companies would slash jobs and unemployment would spike as high as 7% or more — twice its level when the Fed began tightening credit. Unemployment shot to 10.8%, which at the time marked its highest level since World War II.
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Economists predicted last year that the Federal Reserve jacking up interest rates to combat inflation would result in higher unemployment rates but that hasn’t happened. The central bank may be on track to achieve a rare and difficult “soft landing.”
Last year’s spike in inflation, to the highest level in four decades, was painful enough for American households. Yet the cure — much higher interest rates, to cool spending and hiring — was expected to bring even more pain. Yet so far, to widespread relief, the reality has been anything but.
The idea that defeating high inflation would require sharply higher unemployment is based on a long-time economic model that may prove ill-suited for the post-pandemic episode.