Is it worth risking recession to get inflation under control?

·Senior Editor
·7 min read

“The 360” shows you diverse perspectives on the day’s top stories and debates.

What’s happening

By most measures, the United States’ economy has thrived in the two-plus years since it was abruptly derailed by the onset of the coronavirus pandemic. But all those gains — low unemployment, a booming stock market, steady wage growth — have been overshadowed in many ways by persistent inflation that has pushed prices upward at the fastest rate in a generation.

Earlier this week, at a hearing before the U.S. Senate Banking Committee, Federal Reserve Chairman Jerome Powell told Congress it’s “essential” to bring inflation down to a more sustainable rate. Powell insisted that the Fed isn’t “trying to provoke” a recession, but acknowledged that it was “certainly a possibility” that efforts to slow down the economy through interest rate hikes could help to create one.

Inflation — both today and historically — has many causes, but the options that policy makers have to tame it are limited. The most potent tool is to raise interest rates, which makes it more expensive to borrow money and reduces the total amount of money moving around the economy. Over the decades, interest rate hikes have proven effective at getting inflation under control, but they very often result in recession. It took a major increase in interest rates to subdue the severe inflation of the late 1970s, leading to a brutal recession in the early 1980s.

Earlier this month, the Fed raised rates by three-quarters of a percentage point, the biggest hike since 1994. More rate increases are expected in the near future. Many economic forecasters say the Fed’s efforts to control inflation have increased the likelihood that the U.S. will enter a recession in the next year.

Why there’s debate

Experts say it’s still possible for the Fed to engineer a “soft landing” for the economy in which well-targeted hikes temper inflation without stunting economic growth. But, given how difficult that needle may be to thread, there’s debate over whether it’s worth risking a recession if it means getting inflation under control.

Advocates for aggressively attacking inflation say rising prices are the greatest risk facing the economy and that failing to tame inflation now could bring about catastrophic conditions like those seen in the 1970s. Many also agree with Powell’s assessment that the economy is “well positioned” to absorb a slowdown, because so many indicators — particularly unemployment — are so strong right now. Others say that tackling inflation will mean imposing some real harm, but argue that the pain will only become more severe the longer policymakers wait to act.

Critics of this view make the case that interest rate hikes aren’t the solution to our current problem of inflation, which they argue is mostly caused by supply issues resulting from the pandemic and the war in Ukraine. Under questioning from Sen. Elizabeth Warren, D-Mass., at this week’s hearing, Powell conceded that higher interest rates are unlikely to reduce the cost of gas or groceries. “Inflation is like an illness, and the medicine needs to be tailored to the specific problem,” Warren said. The danger, she and others argue, is that rate hikes will cause unemployment to spike and stifle investment, while doing little to alleviate the excess price increases that are causing the most difficulty for Americans.

What’s next

Powell has indicated that another rate hike of one-half or three-quarters of a percent may be in order when the Fed has its next meeting in late July. It may be some time before it becomes clear whether these increases are making a meaningful impact on inflation across the economy.

Perspectives

The longer we wait to get serious about inflation, the more severe the response will be

“A recession is becoming increasingly likely but the longer we wait, the tougher will be the medicine when we face it.” — Peter Morici, MarketWatch

Interest rate hikes will do nothing to address the root causes of inflation

“Interest rate increases will not remedy the major causes of the current inflation—huge pent-up worldwide demand from two years of pandemic, shortages of goods and services responding to that demand, Putin’s war in Ukraine, and big profitable corporations with enough pricing power to use inflation as a cover for pushing up prices even further.” — Robert Reich, Common Dreams

The economy is in a good position to absorb some of the impacts of rate hikes

“As recession warnings pile up, it is important to keep in mind what matters to the real economy: hiring and consumer spending. It’s fine — even preferable to the Fed — for hiring and consumer spending to downgrade from strong to solid. As long as the rich and upper-middle class continue to spend, there probably won’t be a recession. But that doesn’t mean the economy will feel good to many, if not most, Americans.” — Heather Long, Washington Post

Inflation is bad, but rising unemployment is worse

“The Fed and haughty experts ignore that while higher prices are certainly painful, they’re far preferable to the trauma of losing a job.” — Lee Spieckerman, The Hill

A small recession that gets the economy back to stability is worth it

“A mild recession that manages to hold on to low unemployment would spare most workers from layoffs. And if the Fed is able to bring down inflation relatively soon, a contracting economy might not be as bad as it now seems to be.” — Tristan Bove, Fortune

The wrong response could stunt economic growth for a generation

“Millions of Americans are going to be deliberately thrown out of work because an economic model says that’s the only way to blunt inflation, while the seed corn of the next generation is eaten and the basic investments we need to sustain a productive economy are put off.” — David Dayen, American Prospect

We’re here because the Fed has been too timid to go after inflation

“No one wants a slower economy, much less a recession. But a measure of economic pain is the price we must bear for a combination of bad policy and bad luck. Yes, the havoc wreaked by Russia’s invasion of Ukraine played a part, particularly in the surge in energy and food prices. But so have policy errors, for which the central bank bears significant responsibility, along with the Biden administration.” — Steven Rattner, New York Times

The burden of curbing inflation shouldn’t fall on the working class

“Placing the livelihoods of working men and women at risk, as though they’re the people responsible for inflation, is exactly the wrong approach.” — Michael Hiltzik, Los Angeles Times

Even if recession starts to set in, the Fed must stay committed to tackling inflation

“If the central bank has the resolve to keep monetary policy tight despite recession, there is every chance that inflation can be wrought from the system. That requires significant strength and independence, as politicians, investors, and the public would push for rate cuts.” — Philipp Carlsson-Szlezak, Paul Swartz, and Martin Reeves, Harvard Business Review

Without accompanying action from Congress, rate hikes will fail to tame inflation

“While higher interest rates reduce demand for things like houses and cars, they also reduce incentives to create supply. Having the Fed go it alone is a recipe for failure and deep, deep recession. Expect growth to be terrible and inflation to rise still further until policy-makers wise up.” — Kevin A. Hassett, National Review

Efforts to solve inflation must be subtle and flexible

“Before embracing the siren calls of those now clamoring for yet more aggressive policy tightening, Powell might do well to heed his own advice of needing to be humble and nimble, especially given today's highly fragile financial markets. If not, he risks going down in history as not only the one who let the inflation genie out of the bottle, but also as the one who steered the US economy into a recession.” — Desmond Lachman, CNN

The Fed showing it’s willing to act against inflation may mean it doesn’t actually have to

“The more convinced investors are that the Fed will do what’s necessary, the less brutal it will actually need to be. … the Fed must leave no doubt that, absent progress on inflation, it’s ready to step up the pace again.” — Editorial, Bloomberg

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