Radical interest rate hikes to fight inflation will lead to recession? Federal Reserve Bostic: U.S. economy is likely to avoid "deep pain"

By    27 Sep,2022

Atlanta Fed President Raphael Bostic said on Sunday local time that he will continue to work toward the 2% inflation target and is cautiously optimistic that the U.S. economy is likely to be able to avoid "deep pain" and achieve a "relatively orderly "relatively orderly" slowdown.

The Federal Reserve last Wednesday raised the federal funds target rate for the third consecutive time by 75 basis points to a range of 3%-3.25%. The dot plot shows the benchmark rate may rise to 4.4 percent by year-end and 4.6 percent by 2023, signaling a possible 75 basis point hike at the November meeting. Fed Chairman Jerome Powell reiterated his determination to fight inflation, saying he "will stay the course until the mission is accomplished.

"Inflation is high, it's too high. We need to do everything we can to bring down inflation." Bostic said of the Fed's plan to continue to raise interest rates sharply.

The U.S. CPI rose 8.3 percent in August from a year earlier, and inflation remains at a near 40-year high. The Fed's goal is to moderate demand in the economy to stabilize prices, but some are concerned that strict monetary policy could trigger further economic turmoil.

Bostick believes the Fed can achieve its 2 percent inflation target without seriously damaging the economy. "I do think that the Fed will do everything it can to avoid biting pain." He said on a program.

The job market is not expected to be hit hard

Bostic acknowledged that the Fed's actions could lead to job losses. However, he argued that compared to the Fed's previous tightening policies, "if there are job losses, they are likely to be smaller than during past slowdowns."

Bostic believes that despite two consecutive quarters of negative growth in U.S. gross domestic product (GDP), there is still "positive momentum" in the economy. Some people see negative GDP growth as a sign of recession.

"We're still creating a lot of jobs every month. So I actually think the economy has the ability to absorb our actions and slow down in a relatively orderly fashion." Bostic said, noting that "job growth is substantial" in Atlanta.

Treasury Secretary Yellen also believes it is possible for the U.S. to reduce inflation while avoiding a significant rise in unemployment. She said at an event last week, "Fed officials may need to relieve some of the pressure from the labor market, but I'm not saying that the U.S. unemployment rate has to rise to 5 percent to keep inflation under control."

Bostic's remarks come after a week of turmoil in global financial markets. After the Fed raised interest rates, many other central banks, including the United Kingdom and Switzerland, made similar moves, triggering a sharp sell-off in stock markets. Some analysts warned that the risk of a global recession is rising with so many monetary authorities tightening policy at the same time.