Even a recession won’t cure inflation, says former Obama adviser

There is growing talk that the Federal Reserve’s interest rate hikes next year will result in a US recession, but even a Fed-induced recession may not be enough to curb inflation.

So says Jason Furman, the former chair of President Obama’s Council of Economics Advisers and one of the few on the political left to have warned of the inflationary consequences of President Biden’s stimulus package introduced last year to help the economy bounce back to recover from the coronavirus pandemic.

Speaking to MarketWatch on the sidelines of the World Economic Forum in Davos, Furman said a concept called the sacrifice ratio measures how many years of unemployment would cause the inflation rate to fall by one percentage point. And in the 25 years before the pandemic, the victim rate was six percentage points — meaning it would take one year of a 6 percentage point rise in unemployment, or two years of a 3 percentage point rise in the unemployment rate, to knock down inflation by a full percentage point.

Furman also said markets may be unrealistic in expecting inflation to settle at normal levels after a bad patch. In the 1970s, for example, there were several inflation spikes. Markets are also misjudging how aggressive the Fed needs to be as it forecasts a final rate above 4% for the Fed’s interest rate.

“I was looking at 10-year Treasury TMUBMUSD10Y,
and I find it shocking,” Furman said. “The return on it essentially means we just don’t think the Fed will go above 4%, and we think it will actually go down [afterwards] and stay down And that’s the only way to understand it,” he said. Furman said his view of 10-year Treasuries would pose further risks to technology stocks that are already battered, such as the Nasdaq Composite COMP,
is down 29% from its peak.

Furman said the U.S. Senate was right to confirm Federal Reserve Chair Jerome Powell for a second term, though he says Powell was about six months late to fight inflation. Powell did a “spectacular” job in 2019 and also deserves credit for his firefighting when COVID-19 broke out. And Furman said the Biden administration should be given credit for its hands-on approach to the Fed and for the quality of the candidates it nominates.

Furman participated in one World Economic Forum event on the US economy that was distracted by a heated debate about cryptocurrencies. Furman believes that the value of cryptocurrencies is not “much above zero.” “There’s no reason to expect higher returns indefinitely from something where the supply is infinite,” he said. He also said it’s not surprising that cryptocurrencies have proven to be a terrible hedge against inflation.

The general consensus at this panel, which also included Nasdaq CEO Adena Friedman, Senator Pat Toomey and PayPal CEO Dan Schulman, was that the US economy would avoid a recession even if inflation continued to rage. While he says a recession is possible, Furman expects above-trend job growth and below-trend economic growth as productivity normalizes.

CEOs Furman speaks to discuss jobs more than inflation. With aggressive wage growth for the low-skilled, some executives are looking to hire more skilled workers and give them broader responsibilities.

“I don’t think we have a big resignation, and much more I think we have a realignment. People fit different types of jobs, different wages and different benefit packages,” Furman said. He also points out that it’s now much easier for employees to apply for other positions, using tools like Zoom to find potential employers.

He said the Biden administration’s policy of deferring student loans has likely increased inflation by a few tenths of a percent, while a cut in China’s tariffs could bring it down by half a point. But he had no hopeful words after the Biden team’s “original sin” of backing the second fiscal stimulus package last year. “If I were in the White House right now, I would tell the embassy people, whatever message we write, it needs to recognize two facts that are true,” he said. First, inflation will remain high, and second, it’s really hitting working Americans. “I don’t think it’s a great message. The only big message will be when inflation actually comes down,” he said. Even a recession won’t cure inflation, says former Obama adviser

Brian Lowry

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