Two former Federal Reserve officials warn that the US central bank will struggle to rein in the highest inflation in four decades without plunging the economy into a recession.
The criticisms came from the Fed’s two most recent vice chairs: Richard Clarida, who until January was vice chairman of monetary policy formation, and Randal Quarles, a Trump appointee who oversaw the banking regulation until the end of 2021. Their comments come as the Fed races to catch up with inflation – which is at its highest level in 40 years – by aggressively tightening monetary policy.
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“The effect will likely be a recession, given the intensity of inflation and the extent to which unemployment has been reduced,” Quarles said last week during an interview with the “Banking With Interest” podcast. “The Fed is unlikely to be able to handle this until a soft landing.”
That sentiment was echoed by Clarida, now an economics professor at Columbia University, who said the Fed will need to raise its key rate well into “restrictive territory” to cool consumer demand, slow economic growth and curb inflation.
The Fed voted unanimously last week to raise the interbank lending rate by half a basis point for the first time in two decades as it steps up the fight against inflation. Chairman Jerome Powell has nearly promised two more hikes of a similar size at upcoming Fed meetings in June and July, as policymakers seek to “rapidly” bring overnight borrowing costs back to a neutral 2-point range. .25% to 2.5%.
Current market prices show traders expecting the rate to rise to 3.0% and 3.25% by the end of the year, according to data from CME Group, which tracks the exchanges. That would mean the Fed raising rates at every meeting for the rest of the year, including three half-point hikes.
The Fed also announced it would start trimming its massive $9 trillion balance sheet, which nearly doubled in size during the pandemic, as the central bank bought mortgage-backed securities and other Treasuries. to continue to borrow cheaply.
Although the moves marked the most aggressive monetary policy tightening in decades, former central bank officials say policymakers need to do more to rein in consumer prices.
Clarida, speaking at a conference at Stanford University’s Hoover Institute, said policymakers needed to raise rates to “at least” 3.5% – if not more – to stop skyrocketing inflation.
“The Fed has the tools to meet this challenge, officials understand the stakes and are determined to succeed,” Clarida said. “But the Fed’s instruments are blunt, the mission is complex, and tough trade-offs lie ahead.”
Quarles, a known political hawk, was even more blunt in his criticism of the Fed.
“We would have been better served to start gaining the upper hand in September,” he said, attributing the delay in part to the fact that Chairman Biden did not nominate Powell to be Fed chairman until November.
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Powell acknowledged there might be some ‘pain associated’ with lower inflation and curbing demand, but pushed back against the notion of an impending recession, pinpointing the labor market and heavy spending consumption as positive points of the economy.
“It’s a strong economy,” he said Wednesday. “Nothing about it suggests it’s near or vulnerable to a recession.”