February 28, 2023: -The Federal Reserve is to be able to bring down inflation without having to increase interest prices considerably higher, which is affecting a slump, according to a research paper released on Friday.
Ex-Fed Governor Frederic Mishkin is from the authors of the white paper that states the history of central bank efforts to make disinflation.
Despite the sentiments of many present Fed officials that they can handle a “soft landing” while tackling high costs, the paper says that is unlikely to be the case.
“We find no instance in which induced disinflation occurred without a recession,” stated the paper, co-authored by economists Stephen Cecchetti, Peter Hooper and Kermit Schoenholtz.
On Friday, the paper was presented at a monetary policy forum regarding the University of Chicago Booth business school.
The Fed is putting a series of interest rate hikes to tame inflation at its highest level in 41 years. Markets widely anticipate more hikes before the Fed can pause to assess the tighter policy’s economic impact. However, the paper suggested that there’s a way to go.
“Simulations of our baseline model help that the Fed required to tighten policy further to get its inflation objective by 2025,” the researchers state.
“Even assuming stable inflation anticipations, our analysis casts doubt on the capacity of the Fed to engineer a soft landing in which inflation comes back to the 2 per cent target by the end 2025 without a mild recession,” they added.
The paper rejects the idea of increasing the 2% inflation standard. In addition, the researchers state the central bank should abandon its new policy framework, which was given in September 2020. That change implemented “average inflation targeting,” which permits inflation to run hotter than usual in the interest of a more inclusive employment recovery.
The researchers say the Fed should return to its preemptive mode, which increases rates when unemployment decreases sharply.
Fed Governor Philip Jefferson released an answer to the report, saying the present situation differs from previous inflation episodes. He noted that this Fed has more credibility as an inflation fighter than some of its predecessors.
“Unlike in the previous 1960s and 1970s, the Federal Reserve is providing the outbreak in inflation and to maintain that credibility and to preserve the ‘well anchored’ property of long-term inflation anticipation,” Jefferson said.