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Global Letter – Pan Am, the Boeing Stratocruiser, the Fed, and inflation

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Pan Am and the Boeing Stratocruiser

The following is a parable. Please bear with me.

In 1956 my father was flying across the Pacific in a Pan American Airways Boeing Stratocruiser, 1 a propeller plane powered by four huge 28-cylinder 3,500 hp Pratt & Whitney radial piston engines.

About half way between Fiji and Hawaii one of the four engines blew up. The Captain made a safe landing at a small airport on the tiny 40 Km 2 , largely coral, Canton Island 2 that Pan American used at that time as a refuelling base.

Pan Am also had a small team of engineers stationed there, and they had the technical capability to replace the stricken engine: but the spare that was normally kept there was not available, because it had been used the day before. The passengers therefore had to say overnight, in a guest house run by Pan Am, until a replacement engine could be flown in next day from Seattle.

There was much convivial mixing between the passengers and the Pan Am personnel, and my father – a scientist himself, but the son of a mechanical engineer – was able to ask one of the engineers how it was the two engines had blown up on successive days.

The explanation was that flying the route faster reduced overall costs. But neither Boeing nor Pan Am nor Pratt and Whitney could say precisely what the operational limits of the Pratt and Whiney engines would be under the conditions of that route. They had estimates, made by engineers, but no one actually knew. So the only way to find out was to push the engines systematically a bit harder each flight, until they started to blow up. With two having disintegrated on successive flights, Pan Am knew that they now had their answer.

My father recounted this story to me to explain the relationship between theory and experimental evidence: “It is one thing to theorise: it is another to know.” And, somewhat admiringly, he dubbed the whole approach as ‘typically American’.

The Fed and inflation

The parallels are plain.

Economists have their theories about how hard the US economy can be pushed before inflation breaks out. But they do not know.

They have estimates of numbers of unemployed or underemployed labour: but there are uncertainties about whether the unemployed people are where the new jobs will be; whether they have the requisite skills; and what wage will be necessary to induce them back into the labour force.

Similarly there are estimates of the degree of spare capital capacity; but the assessment is complicated by probable early scrapping as a result of COVID-19-induced changes in the structure of demand; the shortening of some supply chains, and changes in technology. And how strongly investment will pick up can in these circumstances really only be guessed at.

No central bank is better supplied with conjunctural data than is the Fed. And it reviews all the evidence meticulously. But nevertheless the Fed does not know – cannot know – just how fast, and for how long, the US economy can grow before it starts to become inflationary.

Accordingly, the Fed has decided that the only way to find out what the limits are is to push the economy until the evidence reveals itself.

Watch fors

If the argumentation above is broadly right, then the Fed will not hurry to slow the economy. It will look through bottleneck inflation. Only when inflation starts to pick up in a way that threatens to become persistent will it react. And then it will trust that, given the undoubted flexibility of the US economy, it will take only a short sharp interest rate shock to bring inflation quickly to heel – and without losing much output in the process.

To assess whether this argument is broadly right, watch for one thing above all:

▪US wages picking up, and starting to grow faster than productivity. 3 ◼


1 For more, see Boeing 377 Stratocruiser – Wikipedia

2 Also spelled Kanton, and also called Abariringa, being the largest and northernmost of the Phoenix Islands, a coral group, part of Kiribati, in the west-central Pacific Ocean.

3 Thus on March 17 the Fed stated that:

“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

See Board of Governors of the Federal Reserve System, 2021. Press Release. 17 March 2021. Available at [Accessed 18 March 2021]

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Global Letter – Pan Am, the Boeing Stratocruiser, the Fed, and inflation

Pan Am and the Boeing Stratocruiser The following is a parable. Please bear with me. In 1956 my father was flying across the Pacific