Frederic Mishkin and four other economists say the Fed’s rate hikes could trigger an economic recession.
Many pundits are on both sides of the debate over whether the Federal Reserve’s rate hikes will cause a recession.
Former Fed Governor Frederic Mishkin, now a professor at Columbia University, and four other economists are leaning “yes.”
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The others are Brandeis University professor Stephen Cecchetti, JP Morgan economist Michael Feroli, Deutsche Bank economist Peter Hooper and NYU professor emeritus Kermit Schoenholtz.
“There is no post-1950 precedent for significant central bank-induced disinflation that does not involve substantial economic sacrifice or a recession,” they said. wrote on a paper.
In the wake of recent strong inflation, employment, and retail sales numbers, many economists and investors believe the Federal Reserve will have to raise interest rates more than was expected just a few weeks ago.
Federal funds terminal rate
At the time, many experts thought the federal funds rate would exceed 5% (the rate currently sits between 4.5% and 4.75%). Also, many thought the Fed would pause its rate hikes after March and then cut them later this year.
Now some experts, like Harvard economist Ken Rogoff, say the Fed may raise the rate by as much as 6% as it tries to bring inflation down to its 2% target. The Fed’s favorite inflation gauge, the personal consumption expenditures price index, rose 5.4% in the 12 months through January.
All five economists/authors appear to be looking for further appreciation in rates. “Our benchmark model simulations suggest the Fed will need to tighten significantly more to achieve its inflation target by the end of 2025,” they said.
Difficult environment for the economy
And that’s not good news for the economy, they point out.
“Even assuming stable inflation expectations, our analysis casts doubt on the Fed’s ability to engineer a soft landing in which inflation returns to the 2% target by the end of 2025 without a mild recession,” they added.
A soft landing would mean that the Fed kills inflation without causing a recession in the economy. The central bank, of course, hopes that it can engineer a soft landing.
Fed Governor Philip Jefferson offered a response to the economists’ article, including some criticism, in a speech on Friday.
Specifically, “history is useful, but it can only tell us so much, particularly in situations without historical precedent,” he said.
For example, “unlike in the late 1960s and 1970s, the Federal Reserve is tackling the inflation outbreak quickly and aggressively to maintain credibility and preserve well-anchored ownership of long-term inflation expectations.”