Why inflation fell without a recession

livemint.com:

without deep recessions. The Federal Reserve will probably soon join central banks in Europe in cutting interest rates, bond yields have fallen sharply since the summer and stockmarkets have shrugged off a growth scare that struck at the beginning of August. America’s economy was in fact bigger in the second quarter of 2024 than had been forecast before the covid-19 pandemic struck.

Monetary tightening is supposed to slow growth, and in the 1980s it quelled inflation only after deep downturns. The apparent lack of damage today has led to the revival of a dangerous myth: that inflation would have gone away by itself. Paul Krugman of the New York Times has even claimed that Jerome Powell, the Fed’s chair, used his speech at Jackson Hole to attribute inflation “largely to transitory pandemic effects", resurrecting an old narrative that central bankers dumped in 2021.

That view is a misinterpretation both of the economy and the speech. Mr Powell said that high inflation “was not transitory". Papers presented at Jackson Hole showed the crushing effect that rate hikes had on mortgage credit, and how the Fed risked losing its credibility as inflation took off.

Even forecasters who expected inflation to persist thought the Fed would not act—meaning they had lost faith in central bankers’ commitment to price stability. The expectation that rate rises would not come risked worsening inflation by pushing down the real, inflation-adjusted rate of interest. Monetary policy does not need to cause a slump to bring down price growth: it must only force the economy to grow more slowly than it otherwise could.