Not in accordance with a recent study’s assertion that such a “immaculate disinflation” has never occurred before. Two Fed officials spoke directly on the research’s conclusions in their own statements on Friday. The paper was written by a group of eminent economists.
The Fed normally reacts by raising interest rates, frequently aggressively, to try to cool the economy and curb price increases when inflation spikes, as it did for the past two years. The increased interest rates set by the Fed raise the cost of mortgages, auto loans, credit card debt, and business loans.
But sometimes inflation pressures still prove persistent and require ever-higher rates to tame. The result steadily rising borrowing costs can force companies to cancel new ventures and cut jobs, and consumers to reduce spending. It all adds up to a recipe for recession.
And that, the research paper concludes, is just what has happened in previous periods of high inflation. The researchers reviewed 16 episodes since 1950 when a central bank like the Fed raised the cost of borrowing to fight inflation, in the United States, Canada, Germany and the United Kingdom. In each case, a recession resulted.
“There is no post-1950 precedent for a sizable disinflation that does not entail substantial economic sacrifice or recession,” the paper concluded.
The paper was written by a group of economists, including: Stephen Cecchetti, a professor at Brandeis University and a former research director at the Federal Reserve Bank of New York; Michael Feroli, chief U.S. economist at JPMorgan and a former Fed staffer; Peter Hooper, vice chair of research at Deutsche Bank, and Frederic Mishkin, a former Federal Reserve governor.
The paper coincides with a growing awareness in financial markets and among economists that the Fed will likely have to boost interest rates even higher than previously estimated. Over the past year, the Fed has raised its key short-term rate eight times.
The perception that the central bank will need to keep raising borrowing costs was reinforced by a government report Friday that the Fed’s preferred inflation gauge accelerated in January after several months of declines. Prices jumped 0.6% from December to January, the biggest monthly increase since June.
The latest evidence of price acceleration makes it more likely that the Fed will need to do more to defeat high inflation.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Friday that the research paper’s conclusions, along with other recent research, “suggest that inflation could be more persistent than currently anticipated.”
“I see the risks to the inflation forecast as tilted to the upside and the costs of continued high inflation as being significant,” she said in prepared remarks.
In December, Fed officials projected that higher rates would slow growth and raise the unemployment rate to 4.6%, from 3.4% now. But they predicted the economy would grow slightly this year and next and avoid a downturn.
Other economists have pointed to periods when the Fed successfully achieved a so-called soft landing, including in 1983 and 1994. Yet in those periods, the paper notes, inflation wasn’t nearly as severe as it was last year, when it peaked at 9.1% in June, a four-decade high. In those earlier cases, the Fed hiked rates to prevent inflation, rather than having to reduce inflation after it had already surged.