Is it worth risking a recession to get inflation under control?

“The 360” shows you different perspectives on the most important stories and debates of the day.

What is going on

By most measures, the United States economy has thrived in the more than two years since it was abruptly derailed by the onset of the coronavirus pandemic. But all those gains – , , – have been overshadowed in many ways causing prices to rise at the fastest pace in a generation.

Earlier this week, during a hearing before the US Senate Banking Committee, Federal Reserve Chairman Jerome Powell said a more sustainable interest rate. Powell insisted that the Fed is not “trying” to provoke a recession, but acknowledged that it was “definitely a possibility” that attempts to slow the economy through rate hikes could help create a recession.

Inflation – both today and historically – has many causes, but the options policymakers have to tame it are limited. The most powerful tool is to raise interest rates, making it more expensive to borrow money and reducing the total amount of money circulating in the economy. In recent decades, interest rate hikes have proven effective in bringing inflation under control, but they . It was necessary to contain the severe inflation of the late 1970s, which led to a brutal recession in the early 1980s.

Earlier this month, the Fed raised interest rates by three-quarters of a percentage point, the largest hike since 1994. More rate hikes are expected in the near future. say the Fed’s efforts to contain inflation have increased the likelihood of the US slipping into recession in the coming year.

Why is there discussion?

Experts say it is still possible for the Fed to achieve a “soft landing” for the economy, with targeted hikes dampening inflation without hampering economic growth. But given how difficult that needle can be to thread, there’s debate about whether it’s worth risking a recession if it means bringing inflation under control.

Proponents of an aggressive attack on inflation say that rising prices pose the greatest risk facing the economy and that failure to contain inflation now could create catastrophic conditions like those of the 1970s. Many also agree with Powell’s assessment that the economy is “well positioned” to absorb a slowdown because so many indicators — especially unemployment — are so strong right now. Others say tackling inflation will mean real damage, but argue the pain will only get worse the longer policymakers wait to act.

Critics of this view argue that rate hikes are not the solution to our current inflation problem, which they believe is mainly caused by supply problems caused by the pandemic and the war in Ukraine. Questioned by Senator Elizabeth Warren, D-Mass., at this week’s hearing, Powell admitted that higher interest rates are unlikely to lower the cost of gas or groceries. “Inflation is like a disease and the drug has to be tailored to the specific problem,” Warren said. The danger, they and others argue, is that interest rate hikes increase unemployment and choke investment, while doing little to mitigate the excessive price hikes that are causing the most trouble for Americans.

What’s next

Powell has indicated that a half or three-quarters percent could be in order when the Fed holds its next meeting at the end of July. It may take some time before it becomes clear whether these increases have a meaningful impact on inflation across the economy.

perspectives

The longer we wait to take inflation seriously, the tougher the response will be

“A recession is becoming more and more likely, but the longer we wait, the harder the drug will be when we face it.” — Peter Morici,

Rate hikes won’t do anything to address the root causes of inflation

“Rate hikes won’t fix the main drivers of current inflation: massive pent-up global demand after a two-year pandemic, shortages of goods and services responding to that demand, Putin’s war in Ukraine, and large profitable companies with sufficient pricing power to use inflation as cover to push prices up even further.” — Robert Rich,

The economy is in a good position to absorb some of the effects of interest rate hikes

“As the recession warnings pile up, it’s important to keep in mind what matters to the real economy: hiring and consumer spending. It’s fine — even preferable to the Fed — to cut staff and consumer spending from strong to solid. As long as the rich and upper middle class continue to spend, there will probably be no recession. But that doesn’t mean the economy will feel good to many, if not most, Americans.” — Heide Lang,

Inflation is bad, but rising unemployment is worse

“The Fed and haughty pundits are ignoring that while higher prices are certainly painful, they are much preferable to the trauma of losing a job.” — Lee Spieckerman,

A small recession that brings stability back to the economy is worth it

“A mild recession that manages to maintain low unemployment would save most workers from being laid off. And if the Fed is able to curb inflation relatively quickly, a shrinking economy may not be as bad as it appears to be.” — Tristan Bove,

The wrong response could stunt economic growth for a generation

“Millions of Americans will be deliberately put out of work because an economic model says it’s the only way to flatten inflation while eating up the next-generation corn and providing the basic investment we need to maintain a productive economy.” persist will be postponed. † — David Dayen,

We’re here because the Fed has been too timid to chase inflation

“Nobody wants a slower economy, let alone a recession. But one measure of economic pain is the price we bear for a combination of bad policy and bad luck. Yes, the devastation wrought by the Russian invasion of Ukraine played a part, especially in the rise in energy and food prices. But so do policy mistakes, for which the central bank, along with the Biden administration, bears a major responsibility.” —Steven Rattner,

The burden of curbing inflation should not fall on the working class

Risking the livelihoods of working men and women, as if they were the people responsible for inflation, is exactly the wrong approach. —Michael Hiltzik,

Even as the recession kicks in, the Fed must remain committed to tackling inflation

“If the central bank has the determination to keep monetary policy tight despite the recession, there’s a good chance that inflation can be roused out of the system. That would require significant strength and independence as politicians, investors and the public would push for rate cuts.” — Philipp Carlsson-Szlezak, Paul Swartz and Martin Reeves,

Without accompanying action from Congress, rate hikes won’t tame inflation

“While higher interest rates reduce the demand for homes and cars, they also reduce the incentives to create supply. Leaving the Fed alone is a recipe for failure and a deep, deep recession. Expect growth to be terrible and inflation will rise further until policy makers become wiser.” — Kevin A. Hassett,

Efforts to solve inflation must be subtle and flexible

Before embracing the siren calls of those now calling for even more aggressive policy tightening, Powell would do well to heed his own advice that he should be humble and agile, especially given today’s extremely fragile financial markets. If not, he risks going down in history as not only the one who pulled the inflation genie out of the bottle, but also as the one who drove the U.S. economy into recession.” —Desmond Lachman,

If the Fed shows it is willing to act on inflation, it may mean it doesn’t really have to

“The more investors are convinced that the Fed will do what it takes, the less brutal it will be. …the Fed should leave no doubt that, in the absence of progress on inflation, it is ready to pick up the pace again.” — Editors,

Is there a topic you would like to see covered in “The 360”? Send your suggestions to [email protected]

Photo illustration: Yahoo News; Photos: Getty Images (3)

Leave a Comment