At the annual gathering of central bankers and economists in Jackson Hole, Wyoming, this year, all eyes were on U.S. Federal Reserve Chair Jerome Powell. Last year at the Jackson Hole conference, Powell had announced a new era in economic policy. This was premised on the assumption that we were in an era of low inflation. The Fed would, in the future, target average inflation, offsetting periods of low inflation below 2 percent per year with periods of more rapid price increase. Today, that world seems very remote. Inflation in the United States is running at more than 8 percent, the most rapid rate since the 1970s. Given this extraordinary turnaround, Powell needed to signal that the Fed was serious about stopping inflation.

How to make the case? Jackson Hole is a meeting of central bankers and economists. But in making his stand, Powell invoked neither economic theory nor econometrics. Instead, he summoned history.

He gave a speech laced with references to the 1970s and 1980s and paid his respects to three of his predecessors—Paul Volcker, Alan Greenspan, and Ben Bernanke. His aim was to signal that though we may no longer be in the era that Bernanke once dubbed the “great moderation,” that does not mean that we are going backward to the future. We are not heading back to the 1970s. The Fed will meet the challenge of inflation promptly and head-on. This time will be different.

In the fall of 2021, Powell still spoke of inflation as transitory. And it remains true that a large part of the price surge has been induced by supply-side issues, such as supply chain bottlenecks and surging oil prices. There is every reason to expect those pressures to ebb in the coming months. But to overemphasize this point would not help Powell make his case. So, instead, he placed emphasis on the inflationary momentum that has built up on the demand side. Investment and consumption are running ahead of capacity. Wage growth has accelerated significantly. To damp this down, the Fed is raising rates, squeezing credit, and encouraging saving. The result, as Powell acknowledged, will likely be a period of “below-trend growth” and some “softening of labor market conditions.” This is central-banker-speak for a recession.