Home Markets The Fed can’t tame inflation without another rate hike, the paper says

The Fed can’t tame inflation without another rate hike, the paper says

by SuperiorInvest

The Federal Reserve Building is seen before the Federal Reserve Board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, January 26, 2022.

Joshua Roberts | Reuters

The Federal Reserve is unlikely to be able to reduce inflation without having to raise interest rates significantly, triggering a recession, according to a research paper released Friday.

Former Fed Governor Frederic Mishkin is one of the authors of a white paper that examines the history of central banks’ disinflation efforts.

Despite the sentiment among many current Fed officials that they will manage a “soft landing” while dealing with high prices, the paper says that is unlikely to happen.

“We have not found any case where the central[bank]induced disinflation occurred without a recession,” said the paper, co-authored by economists Stephen Cecchetti, Michael Feroli, Peter Hooper and Kermit Schoenholtz.

The paper was unveiled Friday morning during a monetary policy forum presented by the University of Chicago’s Booth School of Business.

The Fed has introduced a series of interest rate hikes in an effort to tame inflation, which has been at a 41-year high. Markets generally expect several more hikes before the Fed can pause to assess the impact of tighter policy on the economy.

However, the document suggests that there is probably a way to go.

“Our baseline model simulations suggest that the Fed will need to tighten policy significantly to reach its inflation target by the end of 2025,” the researchers said.

“Even assuming stable inflation expectations, our analysis casts doubt on the Fed’s ability to deliver a soft landing where inflation returns to the 2 percent target by the end of 2025 without a mild recession,” they added.

However, the paper rejects the idea of ​​increasing the 2% inflation standard. In addition, the researchers said the central bank should abandon its new policy framework adopted in September 2020. This change introduced “average inflation targeting”, which allowed inflation to run faster than normal in the interest of a more inclusive employment recovery.

Researchers say the Fed should return to its precautionary mode of raising rates when unemployment fell sharply.

Fed Governor Philip Jefferson released a response to the report, saying the current situation is different from previous inflationary episodes. He noted that this Fed has more credibility as an inflation fighter than some of its predecessors.

“Unlike the late 1960s and 1970s, the Federal Reserve is dealing with bursts of inflation quickly and forcefully to maintain credibility and preserve the ‘well-anchored’ nature of long-term inflation expectations,” Jefferson said.

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