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healthcareSeptember 9, 2022

Higher rates unlikely to cause deep US recession: Powell


The last time the Federal Reserve faced inflation as high as it is now, in the early 1980s, it jacked up interest rates to double-digit levels — and in the process caused a deep recession and sharply higher unemployment.

On Thursday, Chair Jerome Powell suggested that this time, the Fed won’t have to go nearly as far.

“We think we can avoid the very high social costs that Paul Volcker and the Fed had to bring into play to get inflation back down,” Powell said in an interview at the Cato Institute, referring to the Fed chair in the early 1980s who sent short-term borrowing rates to roughly 19% to throttle punishingly high inflation.

Powell also reiterated that the Fed is determined to lower inflation, now near a four-decade high of 8.5%, by raising its short-term rate, which is in a range of 2.25% to 2.5%.

Even so, he did not comment on what the Fed may do at its next meeting in two weeks. Economists and Wall Street traders increasingly expect the central bank to raise its key short-term rate by a hefty three-quarters of a point for a third straight time. That would extend the most rapid series of rate hikes since Volcker’s time.

The Fed’s benchmark rate affects many consumer and business loans, which means that borrowing costs throughout the economy will likely keep rising.

On Thursday, the European Central Bank increased its key rate by three-quarters of a point, the largest in its relatively short history, as Europe also struggles with record-high inflation and a stumbling economy.

Central banks around the world are scrambling to keep up with rising prices. The Bank of Canada on Wednesday lifted rates by 0.75 percentage point and earlier this week the Reserve Bank of Australia implemented a half-point increase.

Despite Powell’s assurances, many economists worry that the Fed will have to allow unemployment to rise much more than is currently expected to get inflation back to its 2% target.

The Fed has projected that unemployment will rise only to 4.1% by the end of 2024 as higher rates bring down inflation. New research released Thursday under the auspices of the Brookings Institution says that such a scenario requires “quite optimistic” assumptions and finds that unemployment may have rise much higher to bring inflation down.

Powell warned two weeks ago at an economic conference in Jackson Hole, Wyoming, that the Fed’s inflation-fighting efforts will inevitably “bring some pain to households and businesses.”

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