The Fed will unlikely bring down inflation without having to raise interest rates \u2018significantly\u2019 higher, causing a recession, according to a research paper released on Friday.
Former Fed Governor Frederic Mishkin is one of the authors of the white paper that examines the history of central bank efforts to create disinflation. Despite the sentiments of several Fed officials that they can manage a \u201csoft landing\u201d while tackling high prices, the paper suggests that is unlikely to be the case.
\u201cWe find no instance in which a central-[bank]induced disinflation occurred without a recession,\u201d said the paper, co-authored by economists Stephen Cecchetti, Michael Feroli, Peter Hooper and Kermit Schoenholtz.
The paper was presented Friday morning during a monetary policy forum presented by the University of Chicago Booth School of Business.
The Fed has implemented a series of interest rate hikes in an effort to tame inflation that had been at its highest level in some 41 years. Markets widely expect a few more hikes before the Fed can pause to assess the impact the tighter policy is having on the economy.
However, the paper suggests that there is probably one way to go. \u201cSimulations of our baseline model suggest that the Fed will need to tighten policy significantly further to achieve its inflation objective by the end of 2025,\u201d the researchers said.
\u201cEven assuming stable inflation expectations, our analysis casts doubt on the ability of the Fed to engineer a soft landing in which inflation returns to the 2 percent target by the end of 2025 without a mild recession,\u201d they added.
Additionally, the paper rejects the idea of raising the 2% inflation standard. In addition, the researchers say the Fed should abandon its new policy framework adopted in September 2020. That change implemented \u201caverage inflation targeting,\u201d allowing inflation to run hotter than normal in the interest of a more inclusive employment recovery.
The researchers say the Fed should go back to its preemptive mode where it started raising rates when unemployment fell sharply. Fed Governor Philip Jefferson released a reply to the report, saying that the current situation differs from previous inflation episodes. He noted that this Fed has more credibility as an inflation-fighter than some of its predecessors.
\u201cUnlike in the late 1960s and 1970s, the Federal Reserve is addressing the outbreak in inflation promptly and forcefully to maintain that credibility and to preserve the \u2018well anchored\u2019 property of long-term inflation expectations,\u201d Jefferson said.<\/p>\n","protected":false},"excerpt":{"rendered":"
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