On Tuesday, local time, Treasury Secretary Janet Yellen, who had been considered a dove for years, made a suspected slip of the tongue, saying that the Fed might be forced to raise interest rates earlier to prevent the economy from overheating, although she retracted her comments later in the day, but financial markets were already nervous. On Wednesday, Vice Chairman Richard Clarida and rare collective voices of Fed governors in Chicago, Boston and Cleveland tried to play down the risk of inflation and try to reassure the market.

In just two days, the former chairman and current officials of the US central bank staged such a dramatic scene that many people felt puzzled. Perhaps the crux of the problem lies in the huge bet made by Jerome Powell, the current chairman of the Fed, that even the former chairman could not help but sweat.

Specifically, Powell is betting that even if more and more companies hire more workers, consumers spend more, companies raise the prices of goods and services, and the U. S. economic recovery picks up, the Fed can still keep interest rates ultra-low. That is, inflation will not get out of control, and they do not have to raise interest rates quickly.

It is important to note that market historians are no stranger to such bets, as more than one of Powell's predecessors made similar actions, but all ended up misjudging the situation and causing damage to the economy.

Powell and other members of the Federal Open Market Committee plan to keep interest rates at almost zero until all Americans who want to work can find jobs, even if inflation exceeds their 2% annual target. Faster economic growth actually means that prices may accelerate, and when something goes wrong, the Fed will be forced to raise interest rates quickly and aggressively, which will plunge the economy into a downturn, or even a recession.

Seizing the timing of interest rate policy adjustment is a very delicate task, which has been the biggest headache for many Fed chairmen for many years. In the 1970s, Arthur Burns, then chairman of the Federal Reserve, became the target of criticism because he was under political pressure from President Nixon to raise interest rates further, causing inflation to spiral out of control. And Alan Greenspan, who held the job for many years and did not retire until 2006, critics point out that it was his failure to raise interest rates fast and hard enough that led to a housing bubble that eventually led to the 2008 global financial crisis and the Great Recession that followed.

Yellen, Powell's predecessor and economy minister in the Biden administration, is no exception. In 2015, she decided to raise short-term interest rates slightly, bringing the latter to an end to the near-zero situation of the previous seven years, and most economists now believe that her rate hike is too early, resulting in a renewed slowdown in economic growth.

However, compared with all his predecessors, Powell's bet this time is still unique. First, the Fed's approach to pursuing its goals has changed fundamentally. The US central bank has been trying to strike a balance between its two main tasks: maintaining price stability and maximizing employment.

But when it comes to Powell, there is clearly more emphasis on employment than any of his predecessors. At the same time, he has greatly extended the meaning of the goal of maximizing employment: he says it should cover the unique challenges of low-income workers, people with less than college degrees, and people of color. Previous Fed presidents have almost never mentioned it.

The Fed's understanding of price stability in the Powell era is also different from most of the time before. In the past, the Fed has always tried to control inflation, but now Powell is trying to achieve price stability by achieving higher inflation. This is because, since the Fed set an inflation target of 2%, it has almost always failed to meet it for a decade. A prolonged downturn in inflation can turn into deflation, and in an environment where prices and wages are falling for a long time, businesses and consumers will become more reluctant to spend.

The war on inflation began in the era of Paul Volcker. Tim Duy, chief economist of the SGH Macro Advisers, recalls the ultra-high interest rates when Walker was chairman of the Federal Reserve in the early 1980s, which, although forced by double-digit inflation, also led to a structural recession. "the war in the Powell era was aimed at unemployment and inequality between the rich and the poor, which is a dramatic change compared with the previous policy orientation. "

A series of recent economic reports show that the US economy emerging from the recession is accelerating: thanks in large part to a $1400 stimulus check, American incomes rose at an all-time high in March. Spending is also growing at a healthy rate. First-time jobless claims fell for the third week in a row. Consumer confidence has returned to pre-epidemic levels. In the first quarter of this year, the economy expanded at an annual rate of 6.4%.

In March, employers created nearly 1 million new jobs, a figure unheard of even before the outbreak. The unemployment rate has fallen to 6% from 14.8% a year ago.

All these developments naturally make people worry about inflationary pressures. Many enterprises have been caught off guard by the rapid rebound in the economy, only to find themselves in high shortage of raw materials and spare parts. Procter & Gamble Co, 3M Company and Coca-Cola Company all announced that they planned to raise the price of their products to offset the impact of the prices of commodities such as wood, sugar and grain. Supply bottlenecks are also pushing up the prices of various parts and components.

However, at a seminar last Wednesday, Powell showed no sign of wavering in his bet. He admits that the economic outlook is getting brighter and brighter. However, he also stressed that the recovery of the job market is far from complete, and 8.4 million jobs lost in the epidemic have not been recovered. He reiterated that the Fed wants to continue to nurture the job market to help those who have lost their jobs, such as waiters in closed restaurants and workers who have been eliminated by automated factories.

However, it is likely to take months or more for these unemployed people to embark on a new career. This means that the Fed's ultra-low lending rates will last longer.

"We hope to get them back to work as soon as possible. "this is an important goal that we are trying to achieve through our policies," Powell said. "

Powell is still trying to play down the risk of long-term high inflation, saying that the recent price increases are mainly caused by supply bottlenecks, which will be solved when companies host new suppliers or raw material producers increase output.

"with the resumption of the economy, there will be a period of one-off price increases. "there is a good chance that inflation will not remain high at an annualized rate in the future," Powell said. "

Other economists, especially former Treasury Secretary Larry Summers, warned that the Fed's low interest rates, the proposed new spending by the Biden administration totaling $4 trillion, and the $5 trillion already approved by Congress pose a major risk of accelerating inflation.

In his speech on Wednesday, Powell also said that if inflation really shows signs of getting out of control, the Fed can control the situation in time by raising short-term interest rates. Higher interest rates will slow borrowing and spending, with the goal of cooling inflation.

But it is clear that the Fed chairman does not think there is much chance of a sharp rise in prices. Powell firmly believes that American consumer companies no longer have the high inflation expectations they did in those years, such as in the 1970s. As long as consumers and businesses have manageable inflation expectations, they usually do not do losses that push up inflation, such as higher wages or product prices. In short, in Powell's mind, as long as inflation expectations do not go wrong, the trouble caused by supply bottlenecks is bound to be temporary.

In any case, at least so far, there are signs that Powell's bet is going well: although consumers expect higher inflation over the next 12 months, according to the latest University of Michigan consumer sentiment survey, but they think it will be temporary. Their long-term inflation expectation is that inflation will average 2.7% a year over the next five years, little different from a year ago.

On Friday, government data showed that prices rose 2.3% in March from a year earlier, but mainly from naturally volatile energy prices. By contrast, "core" prices have risen by only 1.8 per cent.

Powell's Fed says it wants inflation to exceed 2% "for a while", striking some balance with the period when inflation was long below target in previous years. So they are essentially abandoning their decades-long method of adjusting interest rates according to inflation expectations and unemployment. Now, their plan is to start raising interest rates only after seeing evidence that inflation has accelerated, rather than pre-emptively based on expectations, as in the past.

Dewey pointed out that this change is crucial. In the past, when unemployment fell to the point where Fed officials began to worry about causing inflation, they began to raise interest rates, which sometimes directly affected the potential for job growth.

In December 2015, for example, the Fed raised its benchmark interest rate by 1/4 points, with an unemployment rate of 5.1% and an inflation rate of 1.3%. Yellen, then chairman of the Fed, explained their reasons for doing so in an earlier speech in September.

"Why not raise interest rates until the economy reaches full employment and the inflation rate really reaches 2%? "what Yellen said then is exactly what Powell does today." the difficulty of this strategy is that there is a considerable lag in the impact of monetary policy on real economic activity and inflation. "

She warned that if the Fed chooses to wait, it may need to be forced to raise interest rates "relatively suddenly and violently" in the future in order to curb inflation, which could pose an even greater threat to the economy.

After that move, the unemployment rate continued to fall for about four years, to 3.5%, the lowest level in 50 years. At the same time, inflation has barely budged. At the time, Powell himself was a member of the Fed's board.

"the effect at that time was very positive. Harry Holzer, an economist at Georgetown University, commented, "Powell should have learned a lot from there. "