The Federal Reserve warned in a report on Friday that it would be difficult for the US economy to avoid slipping into recession, noting that never before has a central bank succeeded in fighting inflation without economic sacrifice or the Great Recession.
The report noted historical instances of low inflation in major economies dating back to the 1950s, indicating that central banks will find it difficult to achieve their goals of reducing inflation without significantly sacrificing economic activity.
The report, prepared by economists as part of a symposium organized by the Booth School of Business at the University of Chicago in New York, said the Federal Reserve would need to tighten its policy significantly to meet its inflation target by the end of 2025.
Despite the Federal Reserve raising interest rates a year ago, inflation rose again in January, with the aim of raising borrowing costs and thus reducing consumption and putting pressure on prices.
The study compares the current environment to the late 1970s, when Federal Reserve Chairman Paul Volcker dramatically raised interest rates to counter rising inflation.
The report indicated that the US Federal Reserve is late to act today, just as it was 40 years ago.
The report’s authors wrote that the Volcker case shows how costly it can be to reduce inflation after a central bank loses credibility to control inflation, at a time when monetary policy led to unemployment above 10 percent in the 1980s.
However, the labor market has so far proven resilient, with the unemployment rate remaining low at 3.4% in January, while labor shortages remain.
However, Philip Jefferson, one of the Federal Reserve governors, pointed out during the seminar that the unprecedented nature of the pandemic distinguishes the current period.
Although economic models are still useful on more than one level, their application is more difficult… and they should be used with caution in interpretation and judgment, he cautioned, stressing the need for accurate and immediate reading of data.
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