The Fed must push the economy into a significant recession to offset inflationary pressures or inflation won’t get back to 2%
The Federal Reserve is hunting for a unicorn by holding U.S. interest rates steady and hoping that’s enough to bring inflation down to 2% without a recession.
However, through much of the recovery, inflation has outpaced wage growth and consumers have been making up the difference with excess savings that were temporarily boosted by the various COVID relief programs. Also, the U.S. restarting student loan payments will subtract $100 billion annually from household budgets.
The surge in consumer prices since August and September mostly reflected the higher gas-pump prices but not likely many of the knock-on effects of higher costs in other industries. If oil prices reach $100 a barrel owing to the war in Gaza, it could add up to a percentage point to the U.S. CPI over several months.
Economist have dialed back their forecasts about a U.S. recession and if there is one, it should be mild. Surveys of forecasters indicate GDP growth will slip to less than 1% in the fourth quarter of this year and first half of 2024, but shouldn’t go negative. All of which suggests a slowing U.S. economy and rising inflationary pressures. As a result, the Fed must push the economy into a significant recession to offset inflationary pressures, or inflation won’t get to 2%.Since World War II, the U.S. economy has had many bouts with inflation. Only once, in 1994, has the Fed accomplished a soft landing, but the inflation it tamed was hardly significant by today’s standards.
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