During the 1973-75 recession, the Fed reversed its tight monetary policy once it became clear that a serious recession was underway by the end of 1974. On the other hand, Volcker hung tough on inflation during the 1981-82 recession even as the economy reached an unemployment rate of 10.8% during Nov and Dec 1982. This painful monetary policy, though very costly, did dispel inflationary expectations for nearly 40 years. So if the US economy experiences recession next year, will the Fed hang tough in its inflation fight?
Hi John,
interesting question! Frankly, I don't agree fully that the recession has hit the US yet- the benchmark putting 2 Qtrs of negative growth doesn't sell to me. Secondly, the unemployment rate is still climbing and so it doesn't seem possible that US businesses can keep jacking up their prices-then what happens to the recession equation? It cascades. according to my knowledge, the Fed had targeted inflation to be around 2-2.5% however to achieve that millions more jobs would have to go down which is not clever-. It would cause a real blowout in the US economy. Personally, I think the Fed, would try for a softer approach-may be scaling up the inflation target to around 3% and if the US growth rate is still positive -say around 1.5-1.8% we are still ok.
Thank you for your response, Dr. Debkuumar. I agree that the U.S. has not experienced a recession in 2022. Non-farm payrolls through October have demonstrated strong growth, generally between 250K and 500K and the unemployment rate in September was at the lowest level since the late 1960s. Industrial production is up over 3% since the year began. However, given that the effectiveness lag in monetary policy can be a year or more, we will not experience the full impact of the Fed's monetary tightening until well into 2023. It will be interesting to see what the Fed does if industrial production and non-farm payrolls actually fall by this time next year.
The only policy actions that could deter a recession would worsen inflation, thus setting the stage for an even worse downturn sometime in the future.
Multiple Fed officials have stated that the harm from mistakenly ending the anti-inflation efforts too soon would be much greater than the harm from mistakes in the other direction. So in uncertain circumstances, the Fed will keep monetary conditions tight.
The time lag between monetary policy changes and real economic changes is roughly one year; the time lag for the current monetary tightening could be shorter or longer than the historical average.
Predictions of recession timing are much more difficult than the eventual arrival of recession.
Many thanks Stephen Ternyik for your excellent contribution. In his remarks after the 75 basis point increase in the Fed's target for the federal funds rate 11/2/22, Chairman Powell signaled that the US central bank will continue its tough, though belated, stance to combat persistent inflation.
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