The Federal Reserve building is seen before the Federal Reserve Board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington January 26, 2022.
Joshua Roberts | Reuters
The Federal Reserve is unlikely to be able to bring inflation down without significantly raising interest rates and triggering a recession, according to a research report released on Friday.
Former Fed Governor Frederic Mishkin is among the authors of the white paper, which examines the history of the central bank’s efforts to induce disinflation.
Despite the opinion of many current Fed officials that they can pull off a “soft landing” while tackling high prices, the paper says that’s unlikely.
“We cannot find a case in which a central[bank]induced disinflation occurred without a recession,” reads the paper, co-authored by economists Stephen Cecchetti, Michael Feroli, Peter Hooper and Kermit Schoenholtz.
The paper was presented Friday morning during a monetary policy forum presented by the University of Chicago’s Booth School of Business.
The Fed has conducted a series of rate hikes to tame inflation, which has been at its highest level in about 41 years. Markets are broadly anticipating a few more rate hikes before the Fed pauses to assess the impact of tightening policies on the economy.
However, the paper suggests there is likely a long way to go.
“Simulations from our base model suggest that the Fed will need to tighten significantly further to meet its inflation target by the end of 2025,” the researchers said.
“Even assuming stable inflation expectations, our analysis casts doubt on the Fed’s ability to deliver a soft landing, with inflation returning to the 2% target by the end of 2025 without a mild recession,” they added.
However, the paper rejects the idea of raising the inflation standard from 2%. In addition, the researchers say the central bank should abandon its new policy framework, which was adopted in September 2020. This change introduced an “average inflation target” which allowed inflation to run hotter than normal in the interests of a broader employment recovery.
The researchers say the Fed should return to its preemptive mode, where it began raising rates when unemployment fell sharply.
Fed Governor Philip Jefferson issued a response to the report saying the current situation differs from previous episodes of inflation. He noted that this Fed has more credibility as an anti-inflationary than some of its predecessors.
“Unlike in the late 1960s and 1970s, the Federal Reserve addresses the inflation burst promptly and vigorously to maintain that credibility and to preserve the ‘well-anchored’ nature of long-term inflation expectations,” Jefferson said.