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.
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.
Yet so far, to widespread relief, the reality has been anything but: As interest rates have surged, inflation has tumbled from its peak of 9.1% in June 2022 to 3.7%. Yet the unemployment rate, at a still-low 3.8%, has scarcely budged since March 2022, when the Fed began imposing a series of 11 rate hikes at the fastest pace in decades.
If such trends continue, the central bank may achieve a rare and difficult “soft landing” — the taming of inflation without triggering a deep recession. Such an outcome would be far different from the last time inflation spiked, in the 1970s and early 1980s. The Fed chair at the time, Paul Volcker, attacked inflation by escalating the central bank’s key short-term rate above 19%. The result? Unemployment shot to 10.8%, which at the time marked its highest level since World War II.
A year ago, in a high-profile speech, Chair Jerome Powell warned that the Fed was prepared to be similarly aggressive, saying its rate hikes…
