Numerous experts occupy both sides of the debate as to whether the Federal Reserve’s interest-rate increases will cause a recession.
Former Fed Gov. Frederic Mishkin, now a professor at Columbia University, and four other economists lean toward “yes.”
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The others are Brandeis University Prof. Stephen Cecchetti, J.P. Morgan economist Michael Feroli, Deutsche Bank economist Peter Hooper and NYU Prof. Emeritus Kermit Schoenholtz.
“There is no post-1950 precedent for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession,” they wrote in a paper.
In the wake of recent strong numbers for inflation, employment and retail sales, many economists and investors think the Federal Reserve will have to lift interest rates more than was expected just a few weeks ago.
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Fed Funds Terminal Rate
At that point many experts thought the federal funds rate would top out below 5% (the rate currently stands at 4.5%-4.75%). Also, many thought that the Fed would pause its rate hikes after March and then cut rates later this year.
Now some experts, such as Harvard economist Ken Rogoff, say the Fed may boost the rate as high as 6% as it seeks to slash inflation down to its 2% target. The Fed’s favored inflation indicator, the personal consumption expenditures price index, rose 5.4% in the 12 months through January.
The five economists/authors apparently are looking for plenty more rate appreciation. “Simulations 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,” they said.
Tough Environment for Economy
And that’s not good news for the economy, they note.
“Even 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% target by the end of 2025 without a mild recession,” they added.
A soft landing would mean the Fed stamps out inflation without sending the economy into a downturn. The central bank, of course, hopes that it can engineer a soft landing.
Fed Gov. Philip Jefferson offered a response to the economists’ paper, including some criticism, in a speech Friday.
Specifically, “history is useful, but it can only tell us so much, particularly in situations without historical precedent,” he said.
For example, “unlike in the late 1960s and 1970s, the Federal Reserve is addressing the outbreak in inflation promptly and forcefully to maintain credibility and preserve the well-anchored property of long-term inflation expectations.”
