One of the Fed’s central errors of the 1970s, he argued, was excessive confidence in estimates of the so-called natural rate of unemployment, the level to which joblessness can fall without sparking inflation. That mistake helped fuel double-digit inflation by the end of that decade.
By contrast, in the mid-1990s Chairman Alan Greenspan suspected that the economy’s productive capacity was rising rapidly, and so he resisted calls from his colleagues to raise interest rates to prevent overheating and inflation.
“Under Chairman Greenspan’s leadership,” Mr. Powell said, the Fed “converged on a risk-management strategy that can be distilled into a simple request: Let’s wait one more meeting; if there are clearer signs of inflation, we will commence tightening.”
Inflation fell…
