The #Harvard Gazette: Is recession inevitable? Economist says plenty of tools remain

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Federal Reserve Chairman Jerome Powell’s news conference is televised on the floor of the New York Stock Exchange following the Federal Reserve’s largest hike in interest rates in nearly three decades.

AP Photo/Seth Wenig

Jerome Powell seen on a TV at NY Stock Exchange.

Betsey Stevenson examines Fed rate hikes, global uncertainties but also notes current financial strength of firms, households

With gas prices averaging near $5 a gallon and inflation holding steady at 8 percent, the Federal Reserve raised its benchmark interest rate by 0.75 percent last week in an aggressive bid to reduce consumer demand and bring inflation back down to 2 percent. The central bank said it anticipated more rate hikes in the coming months would be needed to achieve that goal. Economist Betsey Stevenson, A.M. ’99, Ph.D. ’01, is a professor of economics and public policy at the Gerald R. Ford School of Public Policy at the University of Michigan. She served on the Council of Economic Advisers during the Obama administration from 2013 to 2015 and was chief economist at the U.S. Department of Labor from 2010 to 2011. Stevenson discusses the effects the new rate increase could have on consumers and the economy and whether a recession is inevitable, as some economists now warn.

Betsey Stevenson

GAZETTE: Will the Federal Reserve’s latest interest rate hike have a meaningful effect on slowing inflation?

STEVENSON: Interest rates are still below where they were in 2018 and 2019 and yet the economy has recovered so quickly from the pandemic recession. I think what we need is a pretty quick move toward normalization, bringing us back to what you might think of as neutral monetary policy, the kind of monetary policy we had prior to the pandemic and then an assessment as to how much further the Fed will need to tighten. The problem is that it can be very jarring to raise rates all at once. And so, the Fed is trying to move quickly enough to bring inflation down, but slow enough to not accidentally push the economy so hard that it goes into recession or people lose jobs or businesses unnecessarily suffer.

And I think this task is made extra hard right now because supply, what businesses produce, is not responding to prices in quite the same way that it has in previous periods. Supply has been less responsive to the surge in demand, which also means that it might be less responsive to the increasing interest rates. The Fed’s tools only influence demand. They want to keep demand and supply in balance, but supply has been harder for them to predict over the last year.

We saw a very rapid rate rise, 75 basis points, which they hadn’t done in a very long time. At the same time, it’s not a big difference in their policy stance. What they’ve been saying all along is they’re trying to move toward neutral monetary policy over the next three to six months to a year and that they are committed to bringing long-run inflation back down to their target of 2 percent. They have also said clearly that they are monitoring and reacting to data as it becomes available. What happened was they moved a bit faster in response to recent data, but where they are in six months might not be any different than if they had done a 50-basis point rate rise.

Read more on https://news.harvard.edu/gazette/

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The Harvard Gazette is the official news website for Harvard University. It covers campus life and times, University issues and policies, innovations in science, teaching, and learning, and broader national and global concerns. It also helps to distribute stories from University affiliates.

The Gazette, which is a division of Harvard Public Affairs and Communications, operates out of offices at 114 Mount Auburn St., Cambridge, MA, 02138.

To contact the Harvard Gazette, email gazette@harvard.edu.

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