Inflation and the Fed’s actions
Inflation and the Federal Reserve’s efforts to conquer it by sharply raising interest rates have eroded many Americans’ spending power and weakened the economy.
Fortunately, suggests Richard Clarida, a former top official at the Fed who is now a global economic adviser to the investment giant PIMCO, inflation has likely peaked and might even fall back to the central bank’s 2% target without causing a deep recession.
As vice chair of the Fed from 2018 to 2022, Clarida worked closely with Chair Jerome Powell. He spoke recently with The Associated Press.
Do you think the current level of the Fed’s key rate — between 5% and 5.25% — is high enough to slow the economy? Or do you think Fed officials will need to go higher to cool inflation?
I do think it’s a close call. The messaging has been skewing somewhat in favor of higher rates, but I think less to tee up a rate hike at the June meeting and more just to give them the option to hike later if they need to. And also to push away from the rate cuts that have been priced in. I think they want the option to pause.
Inflation has come down significantly from its peak of 9.1% last June. Yet many Fed officials have said they see little real progress recently. Why are they taking that gloomier view?
The one thing they point to is that services inflation, excluding housing, has really not improved very much. So our view is we have seen peak inflation. I think the Fed has seen peak inflation, but it’s not coming down as quickly as they would have liked five or six months ago, but it is moving in the right direction.
Some economists say that we’ve had the easy part of disinflation, with price increases now just below 5%, and getting down to 2% will be harder. As a result they argue the Fed should raise its inflation target. Do you agree?
It has been easier to get inflation down from say, 8% to 4% than it will be from 4% to 2%, because food and energy have come down more quickly. The more stubborn parts of inflation — wage inflation and services — will be slower to come down.
I don’t think raising the inflation target is on the table. I do think that, knock on wood, once inflation does get down to two-point something, they may take their time in projecting it will fall to 2%.
Some economists hope for an “immaculate disinflation,” whereby the economy slows enough for inflation to return to 2%, but without a deep recession. What are the chances of that?
It’s what I’ve called a soft-ish landing. In a soft-ish landing scenario, you get a slowdown in growth for four quarters. You get some softening in the labor market, through a combination of firms posting fewer vacancies and some modest rise in the unemployment rate. You could have a situation where inflation is running somewhere in the twos next year. I would certainly call that a pretty darn good outcome.