Jason Furman on Red-Hot Inflation and What To Do About It

Episode Summary

Executive Summary: The episode centers on the 2021 inflation surge and whether it is truly “transitory.” Jason Furman argues inflation should ease from 2021’s peak but likely settle above the Fed’s 2% target because demand remains strong, supply constraints persist, and policy is still highly accommodative. The hosts probe the tradeoff between inflation control, labor-market recovery, and financial stability.

Main Topics: Inflation: transitory vs. persistent (Priority: 5/5): The discussion frames inflation as a broad macro problem rather than just a set of temporary micro shocks, with Furman rejecting a binary use of the word transitory and instead emphasizing probabilities and likely outcomes. Supply chains vs. aggregate demand (Priority: 5/5): The hosts debate whether price pressures are mainly from clogged ports, cars, hotels, and other sector-specific disruptions, or from strong aggregate demand boosted by fiscal stimulus and easy monetary policy. Fed policy, tapering, and rate hikes (Priority: 5/5): Furman argues the Fed should flip its default from waiting for inflation to surprise before acting, to planning gradual liftoff and signaling hikes in 2022 while remaining data-dependent. Labor-market recovery and policy tradeoffs (Priority: 4/5): A key tension is whether the economy is still too weak to tighten policy, given millions of missing jobs, versus whether inflation and asset froth now justify less emergency support. Financial stability and asset markets (Priority: 4/5): The conversation explores how prolonged low rates and large asset purchases may inflate valuations and encourage risk-taking, even if they do little to solve real supply bottlenecks. Hysteresis and higher-pressure economics (Priority: 3/5): The hosts ask whether sustained demand could permanently improve labor-force participation and productive capacity; Furman is cautiously supportive of continued pressure, but only gradually. Fiscal policy and politics (Priority: 3/5): Furman argues fiscal policy should focus on long-term public goods like children, climate, and infrastructure rather than serving as the main inflation tool, and he also addresses how inflation hurts Democrats politically.

Key Arguments: Inflation likely falls from 2021 levels next year, but not necessarily back to 2%; a 3%–4% range is plausible once temporary shocks fade. Demand remains elevated because households have stronger balance sheets, fiscal policy is still adding support, and financial conditions are very loose. Supply constraints—from cars to shelter to labor markets—are unlikely to fully normalize within a year, keeping upward pressure on prices. It is better to use the actual data and probabilities than to rely on the vague term “transitory,” which Furman says he tries to avoid. The economy is still recovering from a major hole, but that does not mean the Fed should remain in full emergency mode indefinitely. The Fed’s stance matters through real rates and market expectations; even without explicit hikes, rising expected inflation has already made policy more expansionary in real terms. Gradual, pre-announced liftoff could reduce market uncertainty and may be less costly than waiting and then tightening more abruptly. Low rates can support capital investment and capacity expansion, but they also need to be balanced against inflation, froth, and recession risk. Fiscal policy should not be judged mainly by its inflation effect; it should be used for goals monetary policy cannot achieve, like climate and infrastructure. Hysteresis may exist, but the economy should be pushed up gradually rather than all at once; the pace of tightening or easing matters. Data Points: CPI inflation: 6% to 6.2% - October CPI was described as the hottest in about 31 years. Core CPI temporary weakness: August and September - Furman said core CPI was temporarily lower in those months because of falling car prices and Delta-related weakness in hotels/airfares. Fiscal support this year: $500 billion - Furman cited fiscal policy as pumping roughly this amount into the economy this year from laws already passed. Unemployment rate: 4.6% - Used to argue the economy is improving but not yet fully healed. Job shortfall: 7 to 8 million jobs - Estimated gap between current payrolls and a pre-pandemic trend path. October jobs report: Over 800,000 jobs - Including revisions, to show rapid employment improvement. Unemployment during the pandemic shock: 20% - Used by the hosts to frame the severity of the recession shock. Inflation target: 2% - Fed target referenced repeatedly as the benchmark inflation is now expected to exceed. Possible next-year inflation outcome: 3% to 4% - Furman’s forecast for inflation after temporary effects wash out. Potential rate hikes: Three hikes in 2022 - Furman’s preferred signaling/expectation for a gradual Fed liftoff. Rate hike size: 25 to 50 basis points - Furman suggested this magnitude would not be alarming if implemented gradually. Prior liftoff unemployment rate: 5% - Compared with the current 4.6% unemployment rate to argue conditions are different now. Late-1990s unemployment: About 4% - Cited as an example where pushing unemployment below perceived natural rates worked well. Pre-COVID unemployment: 3.5% - Used as another example of the economy tolerating lower unemployment than expected. Current legislation size: One-tenth of what was done this past year - Furman argued the pending fiscal package is much smaller than prior emergency stimulus.

Pivotal Quotes: "I don't even know what the word transitory means. So, I try to avoid it, try to use numbers and probabilities." — Jason Furman: His definition of how to assess the inflation debate. "One, the economy is still in a hole. Two, the economy is improving really rapidly. And three, inflation is bad. All three of those statements are true." — Jason Furman: He summarized the competing realities shaping policy. "I would rather see them flip that. We're planning to lift off in the first half of next year." — Jason Furman: His preferred Fed policy default for 2022.

Implications: Listeners should expect inflation to cool from peak levels but remain stubbornly above target, keeping pressure on the Fed to taper and prepare rate hikes. The debate will shape markets, politics, and whether policymakers prioritize inflation control or labor-market healing.