Which leads us to the key point: The Fed has never achieved a soft landing when it has had to push up unemployment significantly. This is memorialized in the Sahm Rule, which holds that a recession is inevitable when the 3-month moving average of the unemployment rate increases by 0.5 percentage point or more. Worse, full-blown recessions have always been accompanied by much larger increases: specifically, over the past 75 years, no less than 2 percentage points.
The Fed needs to adjust how it puts its monetary policy framework into practice. It shouldn’t be completely reactive, waiting passively until inflation exceeds target and the labor market is extremely tight. Such extreme “patience” forces it to slam on the brakes, increasing the likelihood of an early recession. Also, officials need to be more forthright about the road ahead: Getting inflation down will be costly, in terms of jobs and economic growth.
Bill Dudley, a Bloomberg Opinion columnist and senior adviser to Bloomberg Economics, is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.