By Howard Schneider
NEW YORK, Feb 24 (Reuters) – A group of top economists has concluded that the Federal Reserve would struggle to bring inflation down without a hit to U.S. economic activity and a sharp rise in unemployment, and even in this case, it could miss its 2% inflation target.
The study analyzed 16 episodes since 1950, including six in the United States and others in Germany, Canada and the United Kingdom, in which central banks resorted to raising interest rates to achieve the “disinflation”, defined in the analysis as a decrease in the rate of inflation by 2 percentage points or more.
“We found no cases where there was significant central bank-induced disinflation without a recession,” said the researchers, including Stephen Cecchetti, a professor at the Brandeis International Business School and former chief economist at the Bank. international regulations. Michael Feroli, chief economist at JP Morgan; and Frederic Mishkin, of Columbia Business School and former Fed governor and longtime aide to former U.S. central bank chief Ben Bernanke.
The study was presented Friday at a conference hosted by the University of Chicago Booth School of Business, where Fed policymakers will discuss the findings.
The study is not the first to argue that the Fed’s economic outlook, dubbed “immaculate disinflation” by some observers, is unrealistic and will eventually force policymakers to make tough decisions about how much to raise rates to reduce inflation. inflation and at what price they are ready. to pay in terms of job losses.
Some estimates suggest that the unemployment rate, currently at 3.4%, the lowest level in five decades, would need to approach 7% for inflation to come down within a reasonable time frame.
However, a series of rapid rate hikes last year, which took the Fed’s benchmark overnight rate from near zero to the current range of 4.50-4.75%, has up to has now been relatively ineffective.
Some sectors of the economy, such as housing, have been hit hard by tighter credit conditions, but the jobless rate has not changed and overall growth has remained strong, which Fed officials say , advocates a possible “soft landing” in which the economy weakens without falling into recession.
That same resistance, however, and a recent slowdown in the progress seen in monthly inflation data, have raised questions about whether the Fed will have to force higher-than-expected rates, at greater cost to the economy. .
The researchers called the Fed’s most recent economic projections, released in December but expected to be updated in about four weeks, “benign.” According to these projections, inflation will fall to 2.1% by the end of 2025, the economy will continue to grow and the unemployment rate will only increase to 4.6%.
Instead, they said “the cost of reducing inflation to the Fed’s 2% target for 2025 is likely to be associated with at least a mild recession.”
The group concluded that the entity made a “material error” by not raising rates “preemptively” when inflation started to pick up in 2021.
His preferred model estimates that with the official interest rate peaking at around 5.6% this year – already above the 5.1% that Fed officials forecast as adequate in December – inflation would only fall. to 3.7% by the end of 2025. (Edited in Spanish by Carlos Serrano)