The Fed’s economic models didn’t anticipate a pandemic

The Federal Reserve is trying to find a way forward to setting monetary policy based on consumer hopes and fears about the economy as the pandemic wears off.

The Fed’s rate-setting committee will meet on Tuesday and Wednesday to discuss policy changes, news, watch out for investors, businessmen and economic watchers.

But “ghosts of the past” – inflation fears and old economic models – don’t apply to the current weird pandemic economy, said Aaron Klein, senior fellow at the Brookings Institution.

“The Fed is in a difficult position. And the Fed will have to decide whether to keep fighting the problems we face today or not the problems it faced in the 1970s, ”Klein said.

Klein said that many economic models assume that different aspects of the economy tend to move in sync. But the inequalities of the pandemic and its uneven recovery show that it is not.

“COVID has fundamentally changed the way we work and our behavior outside of work. There is a lot out there that I don’t think will turn out the way it was, ”said Patricia Buckley, Managing Director of Economics at Deloitte.

Carola Binder, associate professor of economics at Haverford College, said the Fed recognizes this through its slow and measured response to things like the sudden spike in inflation.

“I think that we as economists and as forecasters now need humility,” said Binder. “When there is uncertainty, there is a certain value in waiting and seeing what happens.”

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