The Fed Has a Narrow Path Between Inflation and Recession
Surging prices and gathering economic gloom are pulling monetary policy in opposite directions.
Did somebody say “transitory”?
Photographer: David Paul Morris/Bloomberg
Last week’s surprisingly bad news on inflation — prices rose 8.6% in the year to May, the highest for 40 years — and the financial markets’ anxious reaction have seriously complicated the Federal Reserve’s job. With policy makers set to announce their latest interest rate decision along with projections for the rest of this year, the Fed’s prospects for curbing inflation while avoiding recession are fast receding.
Having previously expected an increase of half a percentage point in the policy rate, many analysts are now predicting a rise of 75 basis points. The focus on this week’s increase is misleading. What the Fed says about the outlook matters more than any extra quarter-point. Whether it’s 50 or 75 basis points this time, unexpectedly high inflation, should it persist, will call for a faster-than-advertised pace of tightening between now and the end of the year — even if this increases the risk of recession. That’s the message the Fed needs to send.