Leading economists’ research: Rate hikes likely to cause recession
NEW YORK — Can the Federal Reserve keep raising interest rates and defeat the nation’s worst bout of inflation in 40 years without causing a recession?
Not according to a new research paper that concludes that such an “immaculate disinflation” has never happened before. The paper was produced by a group of leading economists.
When inflation soars, as it has for the past two years, the Fed typically responds by raising interest rates, often aggressively, to try to cool the economy and slow price increases. Those higher rates, in turn, make mortgages, auto loans, credit card borrowing and business lending more expensive.
But sometimes inflation pressures still prove persistent and require ever-higher rates to tame. The result — steadily more expensive loans — can force companies to cancel new ventures and cut jobs and consumers to reduce spending. It all adds up to a recipe for recession.
And that, the research paper concludes, is just what has happened in previous periods of high inflation. The researchers reviewed 16 episodes since 1950 when a central bank such as the Fed raised the cost of borrowing to fight inflation, in the United States, Canada, Germany and the United Kingdom. In each case, a recession resulted.
“There is no post-1950 precedent for a sizable … disinflation that does not entail substantial economic sacrifice or recession,” the paper concluded.
The paper was written by a group of economists, including Stephen Cecchetti, a professor at Brandeis University and a former research director at the Federal Reserve Bank of New York; Michael Feroli, chief U.S. economist at JPMorgan and a former Fed staffer; Peter Hooper, vice chair of research at Deutsche Bank’ and Frederic Mishkin, a former Federal Reserve governor.
The paper coincides with a growing awareness in financial markets and among economists that the Fed will likely have to boost interest rates even higher than previously estimated.
Over the past year, the Fed has raised its key short-term rate eight times.
The perception that the central bank will need to keep raising borrowing costs was reinforced by a government report Friday that showed that the Fed’s preferred inflation gauge accelerated in January after several months of declines. Prices jumped 0.6 percent from December to January, the biggest monthly increase since June.
The latest evidence of price acceleration makes it more likely that the Fed will need to do more to defeat high inflation.