Fed Officials, Data Reinforce Need for Persistence in Inflation Fight

As yet another U.S. government report reinforced inflation's nagging persistence Friday, Federal Reserve officials reiterated the need to remain vigilant in their battle to bring it down—even as new research showed the fight likely will spur a recession.

At the University of Chicago Booth School of Business' U.S. Monetary Policy Forum in New York, Federal Reserve Governor Philip Jefferson said the "ongoing imbalance between the supply and demand for labor" and the service sector's large share of labor costs means high inflation will fall "only slowly."

That's why, Jefferson said, the Fed has addressed inflation in the past year "promptly and forcefully" to maintain its credibility in bringing inflation down to its long-term 2% target.

Loretta Mester, president of the Federal Reserve Bank of Cleveland, agreed with Jefferson's view on the pace at which inflation may —or may not—abate.

"I see the risks to the inflation forecast as tilted to the upside and the costs of continued high inflation as being significant," Mester said, adding that inflation "could be more persistent than currently anticipated."

Stubborn Inflation

Jefferson and Mester made their comments in response to a new paper from a group of economists reiterating that, since 1950, global central banks never have succeeded in reducing inflation while sidestepping a recession.

Their speeches also came shortly after the Department of Commerce released its monthly report on Personal Consumption Expenditures, the Fed's preferred inflation gauge. It showed consumer inflation rose to 5.4% on a year-to-year basis in January, a slight increase from 5.3% in December.

The latest data follows this month's stronger-than-expected U.S. jobs report and data showing both consumer spending and retail sales rose last month.

Combined, they seem to indicate that the Fed's interest rate hikes aimed at reducing inflation may not end as soon as many had hoped just a month ago, when the perception of cooling inflation helped boost the S&P 500 Index by 6% in January.

Stocks have fallen this month—Friday's 1.1% decline in the S&P 500 pushed the index's February loss to 2.6%, erasing almost half of January's gain—as investors reassess their inflation viewpoint.

Paper Sheds Doubt Fed Can Avoid Recession

The new research paper buttresses that assessment.

Written by a team of high-level economists with private-sector, academic and Federal Reserve experience, the paper reviewed 16 times since 1950 that a global central bank had raised interest rates to reduce inflation. Each time, a recession ensued.

"There is no post-1950 precedent for a sizable ... disinflation that does not entail substantial economic sacrifice or recession," the paper concluded.

However, Jefferson said current inflation differs from past episodes in a few key respects.

The COVID-19 pandemic created global supply disruptions and has had a long-term impact of limiting labor force participation rates, he said.

Noting financial markets' current long-term expectations near 3% are within range of the Fed's long-term target, Jefferson added the Fed has more credibility than it did during inflationary periods of the 1960s and 1970s and has raised interest rates more quickly and decisively than it did then.

"Economic models are important tools, but need to be used with careful interpretation and judgment when history does not speak to the current situation," he said.