Does Anyone Actually Believe The Fed Can Tame Inflation Without Tanking The Economy?

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Harry Wilmerding Contributor
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Leading economists and financial institutions said they are not confident in the Federal Reserve Bank’s ability to tame inflation without bringing the economy into a recession.

Deutsche Bank warned Tuesday that the Fed’s interest rate hike could cause a “mild” recession starting in late 2023 or early 2024 as the country experiences the fastest growing inflation in 40-years, CNN reported.

“We no longer see the Fed achieving a soft landing,” Deutsche Bank said according to CNN. “Instead we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession.”

The bank anticipates a mild recession with unemployment increasing to about 5% in 2024 but there was still “considerable uncertainty” surrounding the subject. In order to tame the surging inflation, the Fed will have to significantly slow the economy. (RELATED: Prices Are Still Rising Despite The Fed Saying Everything’s Under Control)

“It is now clear that price stability…is likely to only be achieved through a restrictive monetary policy stance that meaningfully dents demand,” the bank said. “It is of paramount importance to get inflation down.”

Former Treasury Secretary Lawrence Summers and Alex Domash, an advancing evidence in policy fellow at The Center For Global Development, published a research paper which found “a very low likelihood that the Federal Reserve can reduce inflation without causing a significant slowdown in economic activity.”

The paper also found that the current tightening of the labor market has occurred in line with recent wage inflation, highlighting another sign of a potential recession.

Meanwhile, a survey from the Boston Consulting Group highlighted concerns among Wall Street’s largest investors, with 65% saying they fear a recession in 2022 or 2023. Respondents said that inflation and interest rates remain their top concern.

The Fed announced on March 16 it would increase interest rates between .25% to .50% throughout 2022 from its near-zero levels. Fed Governor Lael Brainard highlighted the central bank’s commitment to reducing inflation in a speech Tuesday.

“It is of paramount importance to get inflation down,” Brainard said Tuesday, who remained optimistic that the central bank can tame inflation without tanking the economy.  “Accordingly, the Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace.”

Federal Reserve Bank of San Francisco President Mary Daly highlighted her optimism about the short term future of the economy, highlighting the central bank’s continued efforts to fight inflation.

“I’m fairly optimistic about the U.S. economy,” Federal Reserve Bank of San Francisco President Mary Daly said yesterday. “I feel that we’ll be able to get inflation moving down by the end of the year, and we’ll have a slower growth rate, but nothing that tips us into recession this year.”

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