Outside the Box: It will be the Fed’s fault if the economy crashes into recession

by | Jul 28, 2022 | Stock Market

The Federal Reserve’s interest rate policy is one of the most important economic decisions that our government makes. If it were more widely understood, and the Fed were held more accountable, Fed officials would probably be more careful about the downside risks of raising interest rates too much. People talk about the Fed not being able to bring the economy in for a “soft landing” when inflation is too high.  But when the Fed gets it wrong, and pushes the economy into a recession – as it has done in ending the vast majority of economic expansions that have taken place in the United States since World War II – it’s not like a couple of bumps on the runway. It’s more like a plane crash. Millions of jobs can be lost.

The Fed raised interest rates
another 0.75 percentage points Wednesday, continuing its most aggressive monetary tightening in four decades. How far will this go? Breaking news: Was Fed’s Powell dovish or not? 4 key takeaways from Wednesday’s press conference The “inflation hawks,” e.g. economist and former Treasury Secretary Larry Summers, say that if “inflation is to be contained, unemployment is likely to rise to somewhere in the vicinity of 6% or more.” And he appears to be talking about a recession. The difference between even 6% unemployment and the 3.6% we have today is more than 3.9 million jobs.No inflation spiral expected Why should anyone sacrifice the future of so many people? The argument is that inflation will otherwise become permanently higher, or even spiral out of control. But the economists who, with many millions of dollars of resources, produce the most reliable estimates of future U.S. inflation, tell a different story. The International Monetary Fund (IMF) this month projected 3% inflation for 2023. The Organization for Economic Co-operation and Development is projecting 3.5%. And the Federal Reserve itself, in June projected 2.6% for 2023. Few economists would be scared of these levels of inflation for next year. But the inf …

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