(New York) US economy could struggle to escape recession: There is no historical precedent for a central bank successfully fighting inflation without ‘economic sacrifice or substantial recession’, report says presented Friday by the American central bank (Fed).
Citing historical cases of “disinflation” dating back to 1950 in major economies, the report concludes that central banks “will likely struggle to meet their disinflation targets without significantly sacrificing economic activity.”
The report, prepared by economists at a seminar held in New York by the University of Chicago Booth School of Business, finds that the Fed “will need to tighten policy significantly to achieve its inflation target of by the end of 2025”.
Inflation rose again in January, to 5.4% over one year, according to the PCE index published earlier on Friday, favored by the Fed, and which it wants to bring back around 2%.
Because the economy has remained solid, despite the rate hikes the Fed has been carrying out for nearly a year, to increase the cost of credit and, thus, slow down consumption and therefore the pressure on prices.
The analysis identified parallels between the current climate and that of the late 1970s, when former Fed Chairman Paul Volcker drastically raised interest rates to counter soaring inflation.
And, like 40 years ago, the Fed did not react soon enough, the report says.
The Volcker affair “shows how costly disinflation can be once a central bank has lost its credibility to control inflation,” the report authors write, recalling that it led to unemployment above 10% In the 1980’s.
So far, however, the job market has been solid, with the unemployment rate at its lowest, at 3.4% in January, and still a shortage of labour.
However, the “unprecedented” nature of the pandemic makes the current period distinct, pointed out Philip Jefferson, one of the Fed governors, during this seminar.
Economic models, “although still useful in many respects, are more difficult to apply”, and “must be used with careful interpretation and judgment”, he warned, alerting to the need for “a careful examination of real-time data”.