Aged Fed Governor: Chance of a recession is extremely high


Want to bring in former fed Governor Frederick Michigan he's now a Columbia University professor and a CNBC contributor and Rick it's really good to see you it's been a while since we've gotten the chance to talk to you you've got a new paper that's out and it basically says that the FED is damned if they raise rates damned if they don't.

You want to explain that well I don't know if I put it quite that way but the bottom line is that uh in this paper which we we presented the U.S monetary policy Forum that uh one of the things we did is we looked at the history and then we actually did some economic modeling and the history says you look at 16 uh uh uh cases of where.

Central banks actually tightened interest rates when in fact they had to get inflation down and this is in many countries not just the U.S in every single case you got a recession uh and so uh you know maybe this time is different but uh that's usually dangerous thinking so just on that basis alone uh the likelihood of a recession.

Is extremely high and this is particularly true also from a economic theory Viewpoint when a central bank Gets behind the curve as the FED certainly did they made up they made a bunch of mistakes uh particularly in 2021 which as you might know I've been on CNBC uh since April of 2021 being very critical of the pan on this we when.

You get behind the curb in order to get inflation back under control you have to raise rates a lot and in fact you inevitably have a recession so that the you know this is just life uh the FED is actually doing the right thing now they've actually gotten uh uh uh on board to do what they have to do they stop being gradual they stop being they.

Were not preempted they now are uh but the bad news is uh that uh that uh you got to get the economy to slow down in order to get inflation down when it's actually uh burst up in a way that it has recently well Rick let me let me just say there are other people who look at what you're talking about in history where feds try and raise rates and.

Inevitably we wind up in a recession they say it's just because some people will say it's because the banks will raise interest rates for too long go too far as some people are arguing our Central Bank is doing right now there are people calling for a pause saying wait and look around and see the lag effect before you continue to raise.

Rates at additional paces um what do you say back to that I this is super dangerous thinking so uh uh one of the things we look at in the paper is uh we look at a situation which had a lot of parallels now which was the vocal disinflation uh and many people you know vocal is a huge hero uh many people don't really remember what went on there.

The Federal Reserve in October 79 after voker became chair uh raised interest rates to very high levels uh and uh 17 actually was pretty high level uh and then a recession started and they backed off uh the result was that inflation did not come down expected inflation did not come down uh and in fact uh uh uh there was no ability to control inflation the.

FED had lost its credibility and now weakened it uh but to focus the credit he then realized that this was a mistake and then the FED really took out the baseball bat collaborate heads Big Time raised uh federal funds rate to over 20 percent uh and then finally it took several years of very high interest rates than to get inflation down so uh.

It is super dangerous thinking to think that the FED should pivot uh that uh when central banks have done that they haven't completed their job they lose credibility and particularly important is when you've actually gotten behind the curve you have to re-establish credibility and therefore you have to be tough now it's true that you might go.

Too far Central Banking by the way is not an easy business it's uh there's a lot of art to it there is science uh you know uh economists have contributed to that science of monetary policy but a lot is Art and so you never quite get it perfect but on the other hand uh picking that you need to back off because you're too worried about a recession is what.

Produces much worse recessions than otherwise occur people forget that the recession that occurred after the vocal disinflation was actually the most severe in the post-war period in fact the unemployment rate went to above what it did during the global financial crisis uh so uh this is really something that you really don't while inflation.


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