FILE- In this Feb. 5, 2018, file photo, the seal of the Board of Governors of the United States Federal Reserve System is displayed in the ground at the Marriner S. Eccles Federal Reserve Board Building in Washington. The Cleveland …
That’s a big jump in fiscal stimulus and requires higher interest rates to keep inflation in check. Those won’t necessarily curb growth owing to the boost to demand from additional fiscal stimulus. Consequently, many economists believe that real R*, the inflation-adjusted rate of interest that neither slows the economy nor causes inflation to accelerate, is higher now than in the decade before COVID-19. A good estimate is 2%, or the real potential rate of growth in the economy.The consumer price index was 3.3% higher in May than a year earlier.
President Biden proclaimed that Milton Friedman wasn’t making policy anymore. At the height of the pandemic, the Fed printed enough money to purchase $4.8 trillion in Treasury, mortgage-backed and other securities. Households have lost confidence that the Federal Reserve can further tame inflation and that the current cast of policymakers will really do what it takes.
The economy should now slow down because most consumers’ capacity to absorb higher prices is flagging as the extra savings accumulated during the pandemic have finally run out.
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