After more than a year of unprecedented dislocation, there is good news for America’s workers. Job openings are at record levels, and wages are increasing. Last week, Amazon, the country’s second-biggest private-sector employer, announced that it is raising the pay for more than half a million of the company’s employees and offering signing bonuses of a thousand dollars to some new hires. McDonald’s has said that it will increase hourly wages at its company-owned outlets by about ten per cent. Other big employers, including Walmart and Chipotle, are also introducing pay hikes. Figures from the Labor Department confirm the upward trend. Between March, 2020, and March, 2021, inflation-adjusted average weekly earnings in the private sector rose by 3.9 per cent. These wage gains continued into April, when average hourly earnings rose another twenty-one cents, to $30.17. “The data for April suggest that the rising demand for labor associated with the recovery from the pandemic may have put upward pressure on wages,” the Labor Department said, in its latest employment report.

After many decades of wage stagnation, this is an encouraging development, but it has been overshadowed by fears of inflation and a possible labor shortage. The employment report, which was released a couple of weeks ago, also showed a surprising decline in job growth, which Republicans blamed on the Biden Administration’s decision to extend enhanced unemployment benefits. Last week, the Commerce Department reported that the Consumer Price Index rose by 0.8 per cent in April, which boosted the twelve-month inflation rate to 4.2 per cent—the highest level since 2008. “I was on the worried side about inflation and it’s all moved much faster, much sooner than I had predicted,” the economist Lawrence H. Summers, a former Treasury Secretary and adviser to President Obama, said on Twitter on Friday. Many other economists, including President Biden’s top advisers, insist that the inflation spike is a temporary result of bottlenecks associated with the pandemic, such as a shortage of used cars for sale. In April, the price of secondhand vehicles shot up by about ten per cent, and this alone accounted for around a third of the rise in the so-called “core C.P.I.,” which is the bit that policymakers monitor most closely. As the economy recovers, “there’s going to be some choppiness,” Cecilia Rouse, the chair of the White House Council of Economic Advisers, said at a press briefing on Friday.

Caught in the middle of this debate is the Federal Reserve and its chairman, Jerome Powell. Ever since the pandemic began, the central bank has been pouring cash into the economy and keeping short-term interest rates close to zero. It has also introduced an important policy change unrelated to the coronavirus. In its traditional role as the institutional guardian of stable prices and the protector of the investor class, the Fed has long acted preëmptively on inflation, raising interest rates if analysts believed that the target rate of inflation—currently two per cent—was in danger of being breached. (Most recently, the central bank took this step between 2015 and 2018.) Last August, though, the Fed adopted a new policy: it would allow inflation to rise above the target for a time—if officials believed that the rise was a temporary one. Work on this new approach began two years before the pandemic, but the reopening of the economy has presented the Fed with its first significant test. In a speech after the latest inflation figures were released, Richard Clarida, Powell’s deputy, described the price spike as “transitory,” and said that “this is not the time” for the central bank to consider acting to counter inflation.

This week, the Fed’s policymakers are scheduled to meet. At the press conference afterward, reporters are sure to press Powell about inflation fears. Most likely, Powell will reaffirm the Fed’s new wait-and-see policy. “This is not some flash-in-the-pan idea: they are deeply wedded to their new framework,” Ian Shepherdson, the chief economist at the consultancy firm Pantheon Macroeconomics, told me over the weekend. “I’d be astonished if they abandoned it so quickly.” David Beckworth, a former Treasury Department economist who is now at George Mason University, agreed with Shepherdson, but added that the Fed still has some explaining to do to calm the public and the markets. “This is radical, it’s new, and it’s hard for people to understand what temporarily higher inflation means,” he said. The central change is that the Fed has replaced its fixed inflation target—which meant that it acted to counter any rise in inflation of over two per cent—with an “average inflation target” of two per cent over the long run. If inflation rises above two per cent following a period when the rate was below two per cent—as it was for much of the past decade—the Fed will not act immediately. In the new framework, a period of higher inflation is necessary to compensate for the previous undershoot. “We would expect higher inflation temporarily if this new policy is going to work,” Beckworth explained.

The Fed’s new approach reflects a broad change in its attitude toward inflation. After decades of bearing down on every blip, Powell and his colleagues have made a commitment to let the economy run as warm as possible—as long as prices do not take off on a permanent basis. This is a very welcome development. The past few decades have shown that it takes strong growth and a tight labor market for workers to make any sustained wage gains. Slamming on the brakes at the first sign of rising inflation is a recipe for stagnant wages and slow growth. We’ve also learned two more important lessons. In today’s economy, there are deep structural forces holding down inflation, such as enhanced global competition, and wage-price spirals don’t develop quickly. During the nineteen-seventies, it took years, and two oil-price shocks, for price rises to soar out of control. So, even if the current inflation surge does prove bigger and more persistent than policymakers expect, the Fed should have plenty of time to react. “To get high inflation, you need the growth rate of wages to bump up materially for a long period,” Beckworth said. “That still seems a long way off.”

It certainly does, and there is yet another factor for the Fed to consider: there has never been anything like the coronavirus and the scale of the government response that it engendered. “We really don’t have any comparable experience of a rebound fuelled by a cumulative twenty-six per cent of G.D.P. of fiscal support and nearly four trillion dollars of Fed money printing,” Shepherdson told me. “There is just nothing comparable. Anyone who says they know for sure what the final outcome is going to be is kidding themselves.”

In an environment of chronic uncertainty, the most sensible thing to do is to avoid drastic action, and wait for more information to emerge. That is surely what Powell will do this week. And he will be right.