(Headline USA) Federal Reserve Chair Jerome Powell has pledged to do whatever it takes to curb the Biden administration’s self-inflicted inflation crisis, now raging at a four-decade high and defying the Fed’s efforts so far to tame it.
Increasingly, it seems, doing so might require the one painful thing the Fed has sought to avoid: a recession.
Robert Tipp, chief investment strategist at PGIM Fixed Income, said that recession risks are rising, and not only because of the Fed’s rate hikes. The growing fear is that inflation is so intractable that it might be conquered only through aggressive rate hikes that imperil the economy.
“The risk is up,” Tipp said, “because the inflation numbers came in so high, so strong.”
All of which makes the Fed’s inflation-taming, recession-avoiding act even more treacherous.
“It’s going to be a tightrope walk,’’ said Thomas Garretson, senior portfolio strategist at RBC Wealth Management. “It’s not going to be easy.’’
In May, following the trend of prior months, consumer prices rocketed up 8.6% from a year earlier—the biggest jump since the final fiscal quarter of the Jimmy Carter administration in 1981.
That worse-than-expected inflation report helped spur the Fed to raise its benchmark interest rate by three-quarters of point Wednesday.
Not since 1994 has the central bank raised its key rate by that much all at once. And until Friday’s nasty inflation report, traders and economists had expected a rate hike of just half a percentage point Wednesday. What’s more, several more hikes are coming.
The “soft landing” the Fed has hoped to achieve—slowing inflation to its 2% goal without derailing the economy—is becoming both trickier and riskier than Powell had bargained for.
Each rate hike means higher borrowing costs for consumers and businesses. And each time would-be borrowers find loan rates prohibitively expensive, the resulting drop in spending weakens confidence, job growth and overall economic vigor.
“There’s a path for us to get there,” Powell said Wednesday, referring to a soft landing. “It’s not getting easier. It’s getting more challenging.”
It was always going to tough: The Fed hasn’t managed to engineer a soft landing since the mid-1990s.
Powell’s Fed—along with Biden administration Treasury Secretary Janet Yellen (herself a former Fed chair)—was slow to recognize the depth of the inflation threat that many others saw writ clear by the ongoing federal spending sprees and other haphazard economic policies.
Now, the nebulous central bank finds itself having to play catch-up.
“They are telling you: ‘We will do whatever it takes to bring inflation to 2%,’ ” said Simona Mocuta, chief economist at State Street Global Advisors. “I hope the [inflation] data won’t require them to do whatever they’re willing to do. There will be a cost.’’
In Mocuta’s view, the risk of a recession is now probably 50–50.
“It’s not like there’s no way you can avoid it,’’ she said. “But it’s going to be hard to avoid it.’’
The Fed itself acknowledges that higher rates will inflict some damage, though it doesn’t foresee a recession: On Wednesday, the Fed predicted that the economy will grow about 1.7% this year, a sharp downgrade from the 2.8% growth it had forecast in March.
It expects unemployment to average a still-low 3.7% at year’s end, with many having discontinued their job hunts following the pandemic and Democrat-driven policies that disincentivized employment.
But speaking at a news conference Wednesday, Powell rejected any notion that the Fed must inevitably cause a recession as the price of taming inflation.
“We’re not trying to induce a recession,” he said. “Let’s be clear about that.”
However, some suspect that the Left’s inflation-friendly policies may be intentional—a particularly pernicious way to reduce the massive federal debt without cutting spending.
President Joe Biden told The Associated Press on Thursday that he also believes a recession in the United States is not inevitable.
The U.S. is in a better position than any other nation to tame inflation, Biden claimed, contrary to evidence showing that its inflation rate is significantly higher than equivalent countries.
Economic history suggests, though, that aggressive, growth-killing rate hikes could be necessary to finally control inflation. And typically, that is a prescription for a recession.
Indeed, since 1955 every time inflation ran hotter than 4% and unemployment fell below 5%, the economy has tumbled into recession within two years, according to a paper published this year by former Treasury Secretary Lawrence Summers and his Harvard University colleague Alex Domash. The U.S. jobless rate is now 3.6%, and inflation has topped 8% every month since March.
Inflation in the United States, which had been under control since the Carter administration, resurged with a vengeance just over a year ago.
President Joe Biden’s $1.9 trillion stimulus program compounded the crisis, as did the Fed’s decision to continue the easy-money policies—keeping short-term rates at zero and pumping money into the economy by buying bonds—it had adopted two years ago to guide the economy through the pandemic.
Only three months ago did the Fed start raising rates. By May, Powell was promising to keep raising rates until the Fed sees “clear and convincing evidence that inflation is coming down.’’
Americans’ savings, once swelled by government stimulus checks, are now back below pre-pandemic levels.
And inflation itself has been devouring Americans’ purchasing power, leaving them less to spend in shops and online: After adjusting for higher prices, average hourly wages fell 3% last month from a year earlier, the 14th straight drop.
On Wednesday, the government reported that retail sales fell 0.3% in May, the first drop since December.
Now, rising rates will squeeze the economy even harder. Buyers or homes and autos will absorb higher borrowing costs, and some will delay or scale back their purchases. Businesses will pay more to borrow, too.
And there’s another byproduct of Fed rate hikes: The dollar will likely rise as investors buy U.S. Treasurys to capitalize on higher yields.
A rising dollar hurts U.S. companies and the economy by making American products costlier and harder to sell overseas. On the other hand, it makes imports cheaper in the United States, thereby helping ease some inflationary pressures.
Adapted from reporting by the Associated Press