Recession fears rise as Fed fights inflation

Recession fears rise as Fed fights inflation

As Americans feel the pressure of rising inflation, fears grow that a recession is imminent.

The US economy is running hot as record job growth, steady consumer demand and intense labor demand have helped fuel the highest rate of inflation in 40 years.

While the economy has recovered much faster than many economists expected, the speed of the recovery is putting pressure on the Federal Reserve to take more meaningful action to slow price growth.

Wendy Edelberg, director of the Hamilton Project and senior economic studies fellow at the left-leaning Brookings Institution, said the economy has “rebounded” given the amount of fiscal stimulus that has been thrown into the system to keep it afloat during the coronavirus tours” brought pandemic.

But to combat skyrocketing inflation, Edelberg and other economists say a slowdown is essential.

“So the question now is, how smoothly is this slowdown happening?” Edelberg said. “And slowdowns can be painful. So there is absolutely a risk of a recession.”

The Fed’s primary tool for keeping prices stable and the labor market strong is by adjusting the federal funds rate. When the Fed raises or lowers its base rate spread, borrowing costs for home loans, credit cards, and other lending products generally move in the same direction.

When interest rates rise, consumer and business spending tends to fall as the cost of borrowing increases. Higher interest rates also encourage saving, which means less immediate spending in the economy.

After cutting interest rates to near-zero levels early in the pandemic, the Fed launched a series of rate hikes in March to curb rising inflation.

The Fed is hoping that higher borrowing costs will slow the economy enough to contain price growth without halting the recovery.

“Our goal is to restore price stability while encouraging another long expansion and maintaining a strong labor market,” Fed Chair Jerome Powell said last month, adding the bank is aiming for a “soft landing” for the economy as inflation falls and hold on to unemployment.”

Powell, other Fed officials and some economists believe the US economy is strong enough to withstand rising interest rates without slipping into recession or losing jobs. The US added nearly 1.7 million jobs in the first three months of the year, consumer spending has remained strong and there are about two open positions for every unemployed jobseeker.

Those who have faith in the Fed’s handling of inflation believe the bank can contain inflation while only reducing job openings and severe labor needs, rather than slowing the economy with layoffs.

Nonetheless, the Fed is facing serious turbulence as it attempts to steer the recovery to a sustainable pace.

The war in Ukraine, the sanctions imposed on Russia and Moscow’s response have led to rapid increases in the price of oil, gasoline, food, essential minerals and other key consumer goods already affected by inflation. COVID-19 shutdowns in China have also blocked supply chains already overwhelmed by consumer demand.

Dana M. Peterson, chief economist at The Conference Board, said Fed rate hikes could help reduce consumer demand for goods and services, pent-up savings, rising wages and housing heat, but nothing about supply chain dysfunction, COVID , do -19 shutdowns and the war.

“There is very little the Fed can do about the supply-side drivers of inflation, which include supply chain disruptions and also higher global commodity prices. Nonetheless, the Fed will hike interest rates,” Peterson said during a Thursday briefing with reporters.

“I don’t know how confident the Fed is about anything, but I think they’ve abandoned expectations that there will be some kind of natural solution to inflation.”

Economists are warning that more needs to be done to tighten monetary policy to cool the economy, which could still spell pain in the finances of more Americans in the months ahead.

“If you slow down the economy, inflation will go down,” said Ray Fair, an economics professor at Yale University, adding that this allows the Fed to help bring down inflation. “But of course the price for this is slower output growth and higher unemployment.”

And Fair, director emeritus of the National Bureau of Economic Research (NBER), said his own research suggests the Fed did “needs to do quite a bit” to slow down the economy.

“For example, they need to raise the interest rate by more than just two percentage points if they expect a significant reduction in inflation,” Fair said. The Fed’s interest rate is currently in a range of 0.25 to 0.5 percent, and bank officials expect it to rise to around 2 percent by the end of the year.

Some economists fear inflation is rising too fast for the Fed to slow down without raising interest rates enough to halt economic growth.

In March, consumer prices shot up 1.2 percent, according to data released this week by the Labor Department. The data also showed that these prices had increased by 8.5 percent in the past year alone, the highest annual increase in about four decades.

Americans saw prices soar in a variety of areas, from groceries to gasoline and transportation, as the Ukraine-Russia war helped exacerbate the nation’s ongoing inflation problem.

Fair, whose bureau is often used to measure recessions, said the NBERs roughly but not fully define such an event as “two consecutive quarters of negative real GDP growth.”

In recent weeks, reports from institutions such as Bank of America have warned of recessionary shocks. A recent Wall Street Journal poll found that more economists are also changing their minds about the likelihood of a recession. Forecasters estimate “the probability of the economy entering recession at some point in the next 12 months averages 28 percent,” down from 18 percent in January.

In an interview, Desmond Lachman, a senior fellow at the right-wing American Enterprise Institute, said he thinks a recession is likely.

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“In order to [the Fed] To get inflation out of the system, they need to tighten monetary policy, and that’s going to create a recession,” Lachman said.

However, others believe the Fed may have to reckon with higher inflation lingering for a while longer as the central bank continues to slow the economy.

“They’re also going to have to realize that they may not be able to get back to a target of 3 percent or 2 percent (annual inflation) any time soon,” Peterson said, arguing that such an attempt “essentially pushes the US economy into recession.” would”.