The paper says the Fed cannot tame inflation without further raising interest rates

The Federal Reserve building is seen before the Federal Reserve signals plans to raise interest rates in March as it focuses on fighting inflation in Washington, January 26, 2022.

Joshua Roberts Reuters

According to a research paper released on Friday, the Fed is unlikely to be able to bring down inflation without having to dramatically raise interest rates, causing a recession.

Former Fed Governor Frederick Mishkin is among the authors of a white paper that examines the history of central bank efforts to de-inflation.

Despite feelings by many current Fed officials that they could manage a “soft landing” while addressing higher rates, the paper says this is unlikely to be the case.

We haven’t found anything like it[bank]”Stimulated inflation occurred without recession,” said the paper, co-authored by economists Stephen Cecchetti, Michael Feroli, Peter Hooper and Kermit Schoenholtz.

The paper was presented Friday morning during the Monetary Policy Forum presented by the University of Chicago Booth School of Business.

The Fed implemented a series of interest rate increases in an effort to tame inflation, which was at its highest level in nearly 41 years. Markets are broadly anticipating further gains before the Fed can pause to assess the impact of hawkish policy on the economy.

However, the paper notes, there are likely to be a ways to go.

“Our base model simulation indicates that the Fed will need to tighten policy further to achieve its inflation target by the end of 2025,” the researchers said.

They added, “Even assuming inflation expectations are stable, our analysis casts doubt on the Fed’s ability to engineer a soft landing in which inflation returns to the 2 percent target by the end of 2025 without a moderate recession.”

But the paper rejects the idea of ​​raising the inflation standard to 2%. In addition, the researchers say the central bank should abandon its new policy framework adopted in September 2020. This change has implemented “average inflation targeting,” allowing inflation to run hotter than usual in favor of a more inclusive employment recovery.

The researchers say the Fed should return to its protective stance where it began raising interest rates when unemployment fell sharply.

Federal Reserve Governor Philip Jefferson issued a response to the report, saying that the current situation differs from previous periods of inflation. He noted that this Fed has more credibility as an anti-inflationary than some of its predecessors.

“Unlike in the late 1960s and 1970s, the Fed is addressing rampant inflation quickly and aggressively to maintain that credibility and maintain the ‘well-established’ characteristic of long-term inflation expectations,” Jefferson said.