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Cornell expert: Fed’s challenge in 2023 is to get inflation down without big increase in unemployment

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Adam Allington

The strength of the economy in Q4 shows consumer spending remains strong in spite of the Fed’s efforts to cool off the growth rate in order to get inflation down. 

Steven C. Kyle

associate professor, macroeconomics policy expert

Steven Kyle is an associate professor of applied economics and policy at Cornell University. He works in the areas of macroeconomic policy, both in the U.S. and in low-income countries.

“In 2023 the main issue will be if the Fed can get inflation down without a big increase in unemployment. 

“History tells us that it is unlikely they can hit the ‘sweet spot’ of low inflation without higher unemployment – interest rate increases are a blunt instrument with long and variable lags in their effectiveness. This means that if the Fed continues to raise rates until they actually see inflation where they want it, they are likely to have overshot their goal.

“Certainly, this is the typical pattern of post WW2 Federal Reserve anti-inflation episodes of tightening. Nevertheless, as long as the labor market is as tight as it is, workers will continue to take home lots of money which they can then spend.

“On the negative side, the Fed has said they aren’t through with their tightening and there are significant unknowns in the next year, not least of which is the utterly insane wish of some House Republicans to actually push the government into default. Of course, there are also various international wild cards such as the war in Ukraine and the Chinese economy.”

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