Can the Federal Reserve tame inflation with more rate hikes without pushing the U.S. into recession? It’s the critical macro question these days and everyone has an opinion, including a former vice-chairman of the Federal Reserve, Alan Blinder, who says threading this policy needle is possible.
Pushing back on analysis in some quarters, Blinder reasons that the Fed’s job “isn’t as hard as Volcker’s,” a reference to the former Fed chairman Paul Volcker’s hawkish policy of sharp rate hikes in the early 1980s that killed high inflation but at the cost of a deep recession. Blinder, an economics professor at Princeton, added that “I’m not saying it’ll be easy.” He estimates the odds of success are less than 50%.
The Fed’s task isn’t as challenging as it appears, Blinder explained Oct. 27 at the Princeton School of Public and International Affairs in an event to promote his new book, A Monetary and Fiscal History of the United States, 1961–2021.
U.S. headline consumer inflation is roughly 8% in year-over-year terms, far above the Fed’s 2% inflation target. The wide gap implies that the central bank has a challenging task. But Blinder says a closer look at the numbers imply that the job of subduing inflation may not be as difficult as it appears.
For starters, Blinder advises that the Fed focuses on core inflation, which is running at a lower 6.6%. Why focus on inflation excluding food and energy? Because the Fed has little if any control over prices for those commodities, he says.
Inflation linked to supply-chain disruptions is also a factor, but one that’s also beyond the Fed’s control. It’s also a factor that will ease through time, although Blinder admitted that this adjustment is unfolding at a slower-than-expected pace.
Considering these factors persuades Blinder that the Fed’s job is less challenging than a casual review of headline CPI inflation suggests. Rather than trying to reduce pricing pressure from 8% to 2%, he thinks the policy mission is closer to a plan of lowering inflation from around 4% to 2%.
“It’ a tough job,” he concedes, “but it’s not impossible.”
If Blinder’s analysis is correct, the U.S. may be able to avoid a recession.
Maybe, although another widely recognized and influential economist who attended the event, and spoke to your correspondent off the record, is skeptical. “I think a recession starting this winter is possible,” he said.