Chicago Federal Reserve President, Richard Goolsbee, expressed optimism on Thursday about the Federal Reserve's ability to manage inflation without triggering a recession. Speaking at the Peterson Institute for International Economics, Goolsbee highlighted the unique opportunity for the Fed to achieve something quite rare in the history of central banks — to defeat inflation without tanking the economy.
Goolsbee pointed out that recent data shows an unusual trend where inflation is slowing without job losses, running against past U.S. patterns. This indicates that the Fed needs to be extra careful of tying policy to historical relationships that may not hold up in the current economy.
The Fed president also emphasized the importance of expectations and Fed credibility, stating that proposals to raise the inflation target from 2% would be quite risky. Keeping long-run inflation expectations anchored can help lower inflation with less economic pain than was needed in the past, he said.
Goolsbee believes that the surge in inflation seen in 2021 was largely due to supply-related issues stemming from the pandemic. As these issues are unwinding with improvements in supply chain distortions and labor force participation, it is possible to reduce inflation while avoiding a deep recession.
However, he warned that external shocks can still derail this soft landing. These potential shocks include oil price hikes, a slowdown in China, an expanded and prolonged auto strike, and a disruptive government shutdown. Housing will also play a crucial role in continued inflation progress in the next few quarters, with rising home prices potentially boosting market rents.
In terms of productivity growth, Goolsbee noted that better productivity could mean long-run potential is not as low as some have feared, allowing for more growth without inflation. He advised watching the composition of price dynamics, productivity growth, and inflation expectations when trying to assess the path of the economy.
Goolsbee concluded his remarks by expressing his optimism for success in achieving this "golden path" scenario of bringing down inflation without a recession. If the Federal Reserve succeeds, it will be studied for years, and if it fails, it will also be studied for years. "But let's aim to succeed," he said.
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