The Fed cannot tame inflation without more rate hikes, the newspaper says

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 the white paper that examines the history of central banks’ efforts to create disinflation.

Despite the feeling of many current Fed officials that they can achieve a “soft landing” while tackling the high prices, the paper says that is unlikely to be the case.

“We do not find a case where a 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 presented Friday morning at a monetary policy forum hosted by the University of Chicago Booth School of Business.

The Fed has implemented a series of rate hikes to contain inflation, which has reached its highest level in some 41 years. Markets generally expect a few more hikes before the Fed can pause to assess the impact of the tightening policy on the economy.

However, the paper suggests there is likely a way to go.

“Simulations from our base model suggest that the Fed will need to tighten policy significantly further to meet 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 in which inflation returns to its target of 2 percent by the end of 2025 without a mild recession,” they added. them to it.

However, the newspaper rejects the idea of ​​raising the inflation standard from 2%. In addition, the researchers say the central bank should abandon its new policy framework adopted in September 2020. That change implemented “average inflation target,” which allowed inflation to run hotter than normal in the interest of a more inclusive employment recovery.

The researchers say the Fed should return to its preemptive mode, which started raising rates when unemployment fell sharply.

Fed Governor Philip Jefferson responded to the report, saying the current situation is different from past inflation episodes. He noted that this Fed is more credible as an inflation fighter than some of its predecessors.

“Unlike the late 1960s and 1970s, the Federal Reserve has dealt with the outbreak of inflation quickly and forcefully in order to maintain that credibility and preserve the ‘well-anchored’ nature of long-term inflation expectations,” said Jefferson.





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