A Strong Economy Doesn’t Necessarily Make the Fed’s Job Harder

The US economy expanded at a strong 3% last year, though growth slowed to a 1.6% annual rate in the first quarter with a drag from imports. Even so, consumer spending and business fixed investment — which is less volatile, and usually gives a better sense of where the economy is headed — rose at a brisk 3%.

Contrary to what commentators such as former Treasury Secretary Larry Summers might say, this strong economy does not complicate the US Federal Reserve’s fight against inflation, nor is it a reason for the bank to delay rate cuts. The past year shows that it is possible to have a rapid decrease in inflation along with low unemployment and strong growth. Notwithstanding 2024’s bumpy start on inflation, there is reason to believe that the tradeoff between demand and inflation is weaker now than in the past.