Soaring inflation can force companies to cut jobs and cause the public to reduce spending. It's a recipe for recession.
The paper coincides with a growing awareness in financial markets and among economists that the Fed will likely have to boost interest rates even higher than previously estimated. Over the past year, the Fed has raised its key short-term rate eight times.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Friday that the research paper's conclusions, along with other recent research, “suggest that inflation could be more persistent than currently anticipated.” “History is useful, but it can only tell us so much, particularly in situations without historical precedent,” Jefferson said. “The current situation is different from past episodes in at least four ways.”
Some surprisingly strong economic reports last month suggested that the economy is more durable than it appeared at the end of last year. Such signs of resilience raised hopes that a recession could be avoided even if the Fed keeps tightening credit and makes mortgages, auto loans, credit card borrowing and many corporate loans increasingly expensive.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank and a contributor to the new research, said that with inflation proving to be persistent, “that is more in line with a story that in order to get inflation all the way back down to target, it is likely going to require" a recession and a higher unemployment rate.
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