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The economic models of the past didn’t figure on a pandemic

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The Federal Reserve building in Washington, D.C.

The Federal Reserve is navigating between rising inflation and the risks caused by the pandemic. Its interest rate policy committee will meet this week. Daniel Slim/AFP via Getty Images

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The Federal Reserve is trying to figure out a way forward in setting monetary policy based on consumers’ hopes and anxieties about the economy as the pandemic wanes.

The Fed committee that sets interest rates will meet Tuesday and Wednesday to consider changes to its policy, news that investors, businesspeople and economic observers watch for.

But “ghosts of the past” — fears of inflation and old economic models — don’t apply to the current strange pandemic economy, said Aaron Klein, a senior fellow at the Brookings Institution.

“The Fed is in a difficult bind. And the Fed is going to have to decide whether or not to continue fighting the problems we face today or continue fighting the problems they faced in the 1970s,” Klein said.

Klein said many economic models assume that different aspects of the economy tend to move together in sync. But the inequalities of the pandemic and its unequal recovery are showing that’s not the case.

“COVID caused a fundamental shift in how we work and how we behave outside of work. There’s a lot out there that I don’t think it’s going to go back to the way it was,” said Patricia Buckley, managing director of economics at Deloitte.

Carola Binder, an associate professor of economics at Haverford College, said the Fed is acknowledging that by its slow and measured response to things like the sudden spike in inflation.

“I think that we need to have humility right now, as economists and as forecasters,” Binder said. “When there is uncertainty, there’s some value to kind of waiting and seeing what happens.”

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