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Hometoday america newsWhy the 1980s recession haunts the Fed

Why the 1980s recession haunts the Fed

Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, Dec. 14, 2022, at the Federal Reserve Board Building, in Washington. (AP Photo/Jacquelyn Martin)

Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, Dec. 14, 2022, at the Federal Reserve Board Building, in Washington. (AP Photo/Jacquelyn Martin)


The ghost of the early 1980s recession is haunting the Federal Reserve.

With inflation still near 40-year highs and the U.S. economy slowing, the Fed’s aggressive rate hikes have fueled concerns of a central bank-induced recession akin to the one triggered by former Fed Chairman Paul Volcker during the 1980s. While Volcker’s rate shock ended two decades of rising inflation, it did so at the cost of a severe recession.

Fed Chairman Jerome Powell has frequently praised Volcker’s refusal to back down and channeled that persistence into his own battle with inflation. But most economists believe Powell can wage a far less costly war against rising prices, given major shifts in the economy – and Fed policy – since the days of Volcker.

“Inflation looks like it has already peaked and never got near the 14.5 percent peak reached in 1980, so the Fed will not have to raise rates as high as it did back then,” said Eric Swanson, an economics professor at the University of California, Irvine.

“We also benefit today from the experience that we gained back then: Everyone knows that inflation was high and was successfully brought down with high interest rates, so we know the Fed can do it again,” he said.

‘The Fed made a big mistake’

FILE – Job seekers line up outside the New Hampshire Works employment security job center, Monday, May 10, 2021, in Manchester, N.H. (AP Photo/Mary Schwalm, File) Mary Schwalm AP

The ‘80s wage-price spiral and the recession left in its wake scarred generations of policymakers, including Powell, who has effusively praised Volcker’s willingness to defeat inflation at any cost.

Without quashing inflation now, Powell argued Wednesday, price growth could run beyond the Fed’s control and only come down with a crushing recession.

“It’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn’t get the job done, inflation springs back and we have to go back in,” Powell said Wednesday after the Fed boosted rates by 0.25 percentage points and hinted toward more to come this year.

“We have no incentive and no desire to overtighten,” Powell said, referring to risk of the Fed raising rate high enough to cause a recession.

“But … if we feel like we’ve gone too far and inflation is coming down faster than we expect, then we have tools that would work on that,” he continued.

As inflation falls and the job market holds strong, most economists are confident the Fed won’t need to derail the economy for years to bring prices down. The unemployment rate dropped to 3.4 percent in January, according to the Labor Department’s monthly jobs report, all while wage growth continued to drop and relieve some pressure on inflation.

The steady decline of inflation from June’s peak may prove that the U.S. can avoid a debilitating recession driven by double-digit Fed interest rates.

“Last year, some senior economists like Larry Summers were saying that these drastic measures were necessary,” said Dan Altman, chief economist at gig economy site Instawork.

“But now, we’ve had inflation declining without a corresponding increase in unemployment. The economy may not have to go into recession to bring inflation under control,” he added.

Some experts, however, fear the Powell Fed may be driving the U.S. into a needless recession with more rate hikes, even if it won’t be as bad as the one induced by Volcker. Fed rate hikes are notoriously slow to trickle through the economy, and even bank officials acknowledge that the full slowing impact of higher borrowing costs has not yet been felt.

If the Fed has already boosted rates enough to slow the economy toward its 2 percent annual inflation target but keeps increasing them anyway, the steady job market could falter and throw the economy into a downturn.

“Don’t be fooled by Powell’s words of optimism about bringing down inflation without damage to the labor market,” wrote Skanda Amarnath, executive director of research group Employ America, in a Wednesday analysis.

“Even if the unemployment rate starts ticking up and recession risks snowball, the Fed’s current stance is that they will stay idle and only consider easing after it is too late. Not great,” he added.

Copyright 2022 Nexstar Media Inc. | All Rights Reserved. Read more from The Hill at thehill.com

This story was originally published February 6, 2023 6:00 AM.

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