The Federal Reserve is setting out to do something it has never accomplished before: reduce inflation a lot without significantly raising unemployment.
Central bank officials think it is possible with calibrated interest rate increases that slow booming demand just enough to take steam out of an overheated economy. But even one of the Fed’s closest allies, U.S. Treasury Secretary Janet Yellen, sees the risk of failure. “It will require skill and also good luck,” the former Fed chair said in public comments in Washington last week.
During the past 80 years, the Fed has never lowered inflation as much as it is setting out to do now—by four percentage points—without causing recession. In this case, the central bank will need a number of factors out of its control to break its way.
Still, Fed officials can find reason for both optimism and caution from history. In seven different episodes during the past 80 years, inflation has fallen as much as the Fed bank wants it to drop now, with varying outcomes. The episodes suggest that the desired scenario is theoretically possible though the risk of failure is high, especially because the bank is chasing inflation that already exists, rather than addressing the problem before it arises as it did in some earlier episodes.