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Column: Assess the blitz to remember the Fed isn’t targeting GDP

The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, DC, U.S. June 14, 2022. REUTERS/Sarah Silbiger

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ORLANDO, Fla., June 21 (Reuters) – The warning signs are mounting and Federal Reserve Chairman Jerome Powell is struggling to explain how to avoid it: A U.S. recession is very likely if the Fed goes ahead with the hikes anti-inflation interest rate policy that she pointed out.

The thing is, he doesn’t need to explain himself.

The Fed has a dual mandate which states that monetary policy should be calibrated to foster economic conditions that achieve “maximum employment” and “stable prices”. Economic growth, in itself, is not a political objective.

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Of course, a decelerating or contracting economy is more likely to lead to increased job losses, and an expanding economy more likely to accelerate inflation. Pricing pressures can also increase in a slowing economy, potentially leading to “stagflation”.

But rightly or wrongly – and there are compelling arguments to defend this last point – the Fed has made it clear that it will tighten policy as much as necessary to bring inflation back towards its target of 2% from the current high. 40 years of 8.6%.


Although Powell stressed on Wednesday that the Fed was not trying to provoke a recession, a Fed statement later in the week said meeting its inflation target was “unconditional” – indicating that, unlike cycles more recent, “soft landings” that avoid technical recession are not the ultimate goal.

Indeed, the economy may already be close to recession, having shrunk 1.4% in the first quarter and, according to the latest projections from the Atlanta Fed, on the verge of posting 0 growth. % to the second. The message from many Fed policymakers is that the central bank is ready to push rates well into restrictive territory and if the price for that is a period of contraction in growth, so be it.

“The Fed doesn’t have a growth mandate, and there’s no harm in stating the obvious,” said John Silvia, economist and founder of Dynamic Economic Strategy.



The fact that the Fed’s explicit jobs target has already been met with a post-pandemic unemployment rate of 3.6% – close to a 50-year low and what most economists would agree full employment – gives the Fed enough leeway to focus on inflation.

The Federal Open Market Committee’s median projection predicts an unemployment rate of 4.1% in 2024, up from 3.7% at the end of this year. That’s higher than previous forecasts in March of 3.6% and 3.5%, respectively, but still historically low.


Even if unemployment increases by two percentage points over the next 12-24 months, it would still be around the average of the past 75 years – even excluding the extraordinary COVID-related surge two years ago. . And that would also be well below the 6.2% average rate of the last 50 years.

“We hadn’t seen…unemployment rates below 4% until a few years ago. We had seen it for a year in the last 50 years. So an unemployment rate of 4.1 % with inflation on track (down) for 2%, I think that would be a positive outcome,” Powell told reporters on Wednesday.

This is the crux of the problem. The Fed can get away with slowing the economy – or even rolling it back – because the unemployment rate is so low. If the labor market were weaker, the Fed’s landing strip would be much shorter and narrower.


The Fed wants to tighten financial conditions enough to cool inflation, without torpedoing the labor market or the economy. Knowing when to put your foot on the accelerator will be difficult to say the least.

As former Treasury Secretary Larry Summers notes, history shows that whenever inflation has been above 4% and unemployment below 4%, recession has followed.


So far this year, financial conditions in the United States have tightened by nearly 300 basis points, according to Goldman Sachs’ Financial Conditions Index. This is mainly explained by the fall in share prices and the rise in long rates.

Phil Suttle, founder of Washington consultancy Suttle Economics, says the “gorilla in the room” is where the so-called “NAIRU” is – the unemployment rate without accelerating inflation. This is the lowest level of unemployment that can exist in the economy before inflation begins to rise.

Always an imprecise exercise given the difficulties in measuring spare capacity in real time, there is no doubt that the pandemic and the ensuing labor market disruptions have pushed the NAIRU higher. A February academic paper estimated it had risen to almost 6% by the end of last year, from around 4.5% before the pandemic began.

Suttle believes it’s likely to be around 5% or higher, while Silvia believes the Fed will start to wiggle when the jobless rate hits 5%. Until then, however, there is little reason to believe the Fed will blink.

“Labour market data will be crucial in determining when the Fed turns around and says ‘enough is enough.’ It just won’t be where we thought it was,” Suttle said.

Associated columns:

– Fed shredding ‘forward guidance’ – for better or worse (June 15) read more

– The Fed could face the yield curve and the “mea culpa” recession (June 2)

– Another lower leg? Markets not yet prepared for recession (May 27) read more

The opinions expressed here are those of the author, columnist for Reuters

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By Jamie McGeever; Editing by Richard Chang

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

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