There’s a Risky Scenario For the Economy as the Fed Starts to Fight Inflation

Inflation is hot and virtually everyone seems to be on board with the Federal Reserve’s pivot to fighting inflation. Certainly in D.C., where inflation is perceived as hurting Democrats, the perception is that it’s time to shift priorities. But the question, of course, is whether the Fed’s tools (primarily rate hikes) can tamp down inflation, without causing a backslide on employment.

In our latest episode of the podcast with Tim Duy, the chief U.S. economist at SGH Macro and a professor at the University of Oregon, he discusses the fact that historically, the way inflationary episodes ultimately get broken is through the recession channel. You break the momentum of the economy and prices fall.