Recent economic data provides an overwhelming case (if needed) for the Fed to continue or even accelerate its program of tightening monetary policy.U.S. inflation, as measured by the consumer price index, reached Highest level in 40 years In December, it increased to 7% from 6.8% in November. It was the fastest pace of growth since the so-called Volcker shock in 1980, when Federal Reserve Chairman Paul Volcker raised interest rates and pushed the U.S. economy into a deep recession in an attempt to control inflation.

However, while the price data is eye-popping, Labour Market Statistics, released last week, which may provide a stronger case for tightening monetary policy. While surveys of manufacturing firms suggest bottlenecks are easing, cost pressures are becoming more evident in the job market. That threatens to create the kind of self-sustaining inflation driven by expectations of higher prices that led Volcker to take such drastic measures more than 40 years ago.

Although job growth slowed in December, the labor market remained tight. Mainly, annual wage growth accelerated to 4.7%, failing to keep pace with prices but still above the pre-pandemic normal. While job growth fell – the U.S. added just 199,000 jobs – it appeared to be because businesses struggled to find workers: the unemployment rate fell to 3.9%, slightly above February 2020 levels.

The departure of workers from the job market means the U.S. has 3.6 million fewer workers than it did before the pandemic, even as inflation and wage data suggest the U.S. may be very close to what economists call full employment. Current Fed Chairman Jay Powell believes this should not be an obstacle to continued policy tightening. Testify at Senate confirmation hearing This week, he said a prolonged expansion and gradual tightening would serve those workers best.If the central bank falls further behind the inflation curve, it will rate hikes sharply, as Volcker did, triggering a recession.

It’s unclear exactly how much the Fed can do for these workers. As President Joe Biden and the Fed have suggested, a “high-pressure economy” is delivering wage growth and encouraging workers to seek better options — quit rates, Some workers leave voluntarily, has soared. In fact, if wages continue to grow, it may start to make up for about 40 years of stagnation. However, this means that workers who leave may not leave because of a lack of demand.

For this reason, attracting the unemployed back requires more structural reforms. Some workers are absent as the pandemic is not over yet. School closures and coronavirus-related absences from childcare providers mean parents generally still need to stay home. Others may worry about infections in the face-to-face workplace, or that jobs may disappear again with another wave of infections.

Other issues go deeper. Participation in the labor force has declined over the past few decades — and much faster than can be explained by the retirement of “baby boomers” alone. In fact, the participation rate of U.S. women is now lower than that of Japanese women, thanks more to the successful reforms of former Japanese Prime Minister Shinzo Abe than to the country’s ultra-loose monetary policy. The Federal Reserve has done its part to ensure a strong recovery, and it is time for U.S. lawmakers to do the same.