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Tuesday, March 21, 2023

Will the Fed be able to reduce US inflation without affecting the economy?

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“We found no case where there has been significant central bank-induced disinflation without a recession”said the researchers, including stephen cecchettiProfessor at the Brandeis International Business School and former Chief Economist at the Bank for International Settlements; michael feroli, chief economist at JP Morgan; and Frederic Mishkinof Columbia Business School and former Fed Governor and longtime collaborator of former US central bank chief Ben Bernanke.

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The study was presented this Friday at a conference organized by the Booth School of Business at the University of Chicagoin which Fed policymakers to debate findings.

harsh conclusions

The study is not the first to argue that Fed economic outlookdubbed “immaculate disinflation” by some observers, are unrealistic and at some point will force decision makers to make difficult decisions about how much rates need to rise to reduce inflation and what price they are willing to pay in terms of job losses.

Some estimates suggest that the unemployment ratecurrently at 3.4%, the lowest level in five decades, would have to approach 7% for inflation to decrease within a reasonable time.

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As analyzed, the rapid rate hikes last yearwhich pushed the Fed’s benchmark interest rate from near zero to the current range of 4.50%-4.75% in one day, it was relatively inefficient.

Some sectors of the economy, such as housingthey saw each other affected by the tightening of credit conditionsbut the unemployment rate did not change and the overall growth held firmwhich, according to the Fed authorities, suggests a possible “soft landing” in which the economy weakens without falling into recession.

However, that same resistance, and a recent slowdown of the advance observed in month-on-month inflation dataaroused Doubts about whether it will be necessary to force rates up more than expectedwith a higher cost to the economy.

the researchers called the Fed’s latest economic projections “benign”published in December but will be updated in about four weeks. According to these projectionsthe inflation will drop to 2.1% at the end of 2025the economy will continue to grow and the unemployment rate will only rise to 4.6%.

The group concluded that the entity made a “significant error” by not raising rates “preventively” when inflation began to accelerate in 2021. They estimate that with a official interest rate that reaches a maximum around 5.6% this year -already above the 5.1% that Fed officials projected as adequate in December- inflation would only drop to 3.7% at the end of 2025.

Source: Ambito

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