AYESHA RASCOE, HOST:
Inflation, as we know, is sky high. The Federal Reserve hopes to bring it back down to earth by raising interest rates. But there's a possible downside. Here's how economist Austan Goolsbee put it on this program last week.
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AUSTAN GOOLSBEE: You know, we've had 13 or 14 recessions since World War II, and more than two-thirds of those recessions were caused by the Fed raising the interest rate faster than the economy can handle.
RASCOE: So what are the chances that the Fed can curb inflation without crashing the U.S. economy? We're going to talk through that now with NPR chief economics correspondent Scott Horsley. Hi, Scott.
SCOTT HORSLEY, BYLINE: Great to be with you, Ayesha.
RASCOE: So we keep hearing about how the Fed wants to engineer a soft landing. What does that mean?
HORSLEY: It means slowing down the economy so we don't have these runaway price hikes, but doing so in a controlled way so you don't stall the economy and end up in a recession. Ideally, as the Fed raises interest rates, spending will gradually slow down, supply gets to catch up with demand, inflation cools off. But you need a careful hand on the throttle so you don't wind up in a crash.
RASCOE: What is the central bank's track record when it comes to being able to pull this off?
HORSLEY: In the last five decades, there's really only been one perfectly soft landing. That was in the mid-1990s. Alan Blinder, who was vice chair of the Fed at the time, has made a study of this. He says there are actually a half-dozen other times since 1965 when the Fed managed to pull off what he calls a softish landing - that is, they raised rates with little or no decline in the GDP and only a modest increase in unemployment.
ALAN BLINDER: The moral of the story to me was softish landings are not as rare as was thought.
HORSLEY: In fact, since the mid-'60s, Blinder says, the Fed's managed to achieve a softish landing a little over half the time.
RASCOE: So what happened those other times when they didn't manage to do the softish landing?
HORSLEY: Yeah, sometimes they weren't even trying. You know, in the late 1970s, for example, inflation had been way too high for way too long. Then Fed Chairman Paul Volcker basically slammed the brakes on the economy, triggered a deep recession. It worked in the sense that it did bring inflation under control, but at a very steep cost. Unemployment soared above 10%. Blinder says there were two other recessions that followed a period of interest rate hikes that weren't really caused by the Fed's moves. Most recently, for example, in 2020, we had a deep recession, but it wasn't the Fed's fault. It was caused by the pandemic. So Blinder says to avoid that takes both skill at the Fed and some good luck.
RASCOE: So how is the Fed's luck so far? Like, are they having some headwinds or some tailwinds?
HORSLEY: Some of both, actually. There are definitely challenges that are making the Fed's job harder, including ongoing pandemic lockdowns in China, lingering supply disruptions, of course, the war in Ukraine, which has sharply driven up the price of energy and food. On the plus side, though, the central bank does have a couple of things going for it. Even though inflation is very high right now, it hasn't been high for all that long, so it's not baked into people's expectations the way it was back in the 1970s. That helps.
Also, we are approaching this landing with a really strong labor market. So even if the landing is bumpier than we'd like, it's unlikely we'll see anything like the double-digit unemployment that people suffered through in the early 1980s. Fed Chairman Jerome Powell said last month if unemployment were to tick up by, say, half a percentage point as the price of getting inflation under control, he would consider that a successful outcome. And Blinder agrees with a caveat.
BLINDER: To the people that lose their jobs, this is not soft at all.
HORSLEY: The Fed is expected to boost interest rates again later this week, so put your seat back and tray table up and buckle in.
RASCOE: That's NPR chief economics correspondent Scott Horsley. Scott, thank you so much.
HORSLEY: You're welcome.
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