The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, January 26, 2022.
Joshua Roberts | Reuters
The Federal Reserve is unlikely to be able to bring down inflation without having to raise interest rates considerably higher, causing a recession, according to a research paper released Friday.
Former Fed Governor Frederic Mishkin is among the authors of the white paper that examines the history of central bank efforts to create disinflation.
Despite the sentiments of many current Fed officials that they can manage a “soft landing” while tackling high prices, the paper says that is unlikely to be the case.
“We find no instance in which a central-[bank]induced disinflation occurred without a recession,” said the paper, co-authored by economists Stephen Cecchetti, Michael Feroli, Peter Hooper and Kermit Schoenholtz.
The paper was presented Friday morning during a monetary policy forum presented by the University of Chicago Booth School of Business.
The Fed has implemented a series of interest rate hikes in an effort to tame inflation that had been at its highest level in some 41 years. Markets widely expect a few more hikes before the Fed can pause to assess the impact the tighter policy is having on the economy.
However, the paper suggests that there’s probably a ways to go.
“Simulations of our baseline model suggest that the Fed will need to tighten policy significantly further to achieve its inflation objective by the end of 2025,” the researchers said.
“Even assuming stable inflation expectations, our analysis casts doubt on the ability of the Fed to engineer a soft landing in which inflation returns to the 2 percent target by the end of 2025 without a mild recession,” they added.
The paper, however, rejects the idea of raising the 2% inflation standard. In addition, the researchers say the central bank should abandon its new policy framework…
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