The Fed’s flawed plan to avoid a recession

are no longer hawks or doves, but optimists or pessimists. With annual inflation running at 8.6% in May, everyone agrees the Federal Reserve needs to raise interest rates sharply, and on June 15th it did so by 0.75 percentage points. The disagreement now is not over whether the Fed must but how painful the consequences will be. Pessimists point to the long history of bouts of monetary-policy tightening being followed by recessions. Optimists say the Fed can bring inflation down to its 2% target merely by slowing economic growth.The Fed is in the optimists’ camp. In a recent speech Christopher Waller, one of the central bank’s rate-setters, spelt out the argument. It hinges on America’s hot labour market. There were almost twice as many job openings as there were unemployed workers in April, with the ratio near a record high reached in March. And wages are more than 5% higher than a year ago. (Such is the heat that McDonalds is cutting workers from the kitchen, by shrinking its menus.) Although wage growth is slowing a little, the obvious imbalance between the demand for workers and their supply means the Fed cannot count on further cooling. Without it, prices are likely to continue , too, as workers spend their incomes and firms pass on their costs.