The US Federal Reserve’s carefully crafted move last year to a jobs-first monetary policy, touted as giving workers their best chance after the pandemic, is being tested by a potentially table-turning rebound of inflation and what’s become a relative rush of policymakers determined not to let it get out of hand.

When the Fed unveiled its new framework just 10 months ago, with a view that employment could expand as much as possible as long as prices did not rise too fast, the language was kept vague on key points in order to maintain unanimous support. The limits to that “big tent” approach are now becoming clear.

Three months ago a clear majority of policymakers saw no rate increases for at least three years. Projections out last week showed fewer than a third remain in that camp, with a larger block who see liftoff by the end of next year on the basis of two months of strong inflation.

With a promised “broad and inclusive” jobs recovery still elusive, analysts parsing that large and fast shift wondered if the new framework was giving way to an old-school Fed debate over sacrificing more extensive job growth to keep inflation at bay - a tradeoff the central bank has acknowledged it too hastily accepted in the past.

The faster inflation and slower-than-expected employment rebound have taken officials “in a direction they were not expecting,” said Nathan Sheets, a former Treasury official and chief economist at PGIM Fixed Income. “Their framework is not designed so much to manage through episodes of high inflation” as to boost inflation that had been too low.

“It will be a more divided Federal Reserve than we have seen during the pandemic. Being true to the framework and balancing the risks is going to be a heavy lift.”

Fed Chair Jerome Powell has said it’s a feat that can be pulled off.

Whether he and the Fed’s other core policymakers remain convinced they can support a robust jobs recovery and control inflation will be the subject of intense interest in coming weeks, beginning on Tuesday when Powell testifies before Congress.

The new framework has made one clear break with the past.

Across the board, policymakers say they’ll accept a period of inflation above the Fed’s 2% target before raising short-term interest rates from their near-zero level. That aims both to allow more people to work - employment tends to grow when rates are lower and consumers spend more freely - and to offset a decade of inflation shortfalls.

Those anticipating earlier and faster interest rate hikes merely see inflation moving at a faster pace to, and for a time slightly above, the 2% threshold, St. Louis Fed president James Bullard said on Friday, counting himself among the seven officials anticipating rate increases in 2022.

Bullard sees a preferred measure of inflation at 3% in 2021 and 2.5% in 2022, and “that would meet our new framework...Other members have other forecasts” that warrant later rate increases.

“This is very much a debate about what is going to happen in 2022” with inflation, he said.

But it is also a debate that will measure how deep the commitment to the new framework runs, what magnitude of inflation “overshoot” different officials will tolerate, and how quickly the Fed reacts if higher inflation persists.

The framework is silent on those and other issues critical to key industries like autos and home building where sales are sensitive to interest rates, and for households wondering how long prices may keep surging.—Reuters