Opinion: How to make sense of the passionate arguments about what the Fed should do next

CAMBRIDGE, U.K. —Economic-policy discussions in the eurozone, the United Kingdom, and the United States increasingly revolve around the question of when and how quickly central banks should pull back the uber-stimulus measures implemented last year in response to the COVID-19 pandemic.

After that, the two camps disagree. One group believes that much of the remaining journey will be uphill and is therefore not too worried about the curves along the way. It would prefer to keep its foot on the accelerator, pedal-to-the-metal, lest the vehicle decelerate or stall. Jobs puzzle The big labor-market puzzle is that, despite massive demand, the labor market is unable to match unemployed workers to jobs. The situation is particularly stark in the U.S. While job openings and labor turnover survey data for April show that there were a record number of job openings in the U.S.—more than 9 million—labor-force participation remains stubbornly low, and unemployment high, compared with pre-pandemic levels.

Inflation: transitory or persistent? How “transitory” is today’s inflation? The pedal-to-the-metal camp has a surprisingly strong conviction that the current uptick in inflation will sharply reverse itself. As the year progresses, they expect base effects to wash out together with the supply and demand mismatches.

Time to ease off In the current policy debate, this decision-making framework offers greatest clarity at the edges. For example, there is a compelling case for the Federal Reserve to start easing its foot off the accelerator. Economic growth is buoyant, fiscal policy is also extremely expansionary, and businesses and households alike have significant accumulated savings that they will now be spending down.

Other central bankers around the world may be tempted to think that they are simply spectators in all this. They are not. The Fed, the ECB, and the BOE are systemically important: their actions often have meaningful spillover effects on the global economy.

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