Powell probably has to push the economy into recession in order to regain control of prices
The path and ultimate destination of interest rates in coming months will partly depend on how quickly—and how far—policy makers want inflation to cool and how much pain they’re willing to put the economy through to achieve that.
Ethan Harris, head of global economics research at Bank of America Corp., said the Fed would probably be willing to compromise and accept a plateauing of inflation at 3%, with the idea of addressing the overshoot of its target gradually over time. That would allow it to avoid pushing the U.S. into a downturn.
Former International Monetary Fund chief economist Olivier Blanchard bemoaned the “screw up” by the Fed and other central bankers in allowing inflation to get out of control. But overly aggressive action to tackle persistent price pressures carries dangers as well, said the Princeton University professor. It could push the economy into a very severe recession that sends unemployment skyrocketing.Deutsche Bank economist Peter Hooper, who was among the first on Wall Street to forecast a recession, said it would be a “Burnsian mistake” if the Fed backed off from its 2% price target. And that’s a mistake he said that Powell doesn’t want to make.
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