The cost of the Fed's fight against inflation: Unemployment may need to hit 7.5%, hard landing inevitable
2022-09-09 18:02:31

In the face of the current high inflation environment, can the United States achieve a soft landing? Economists have recently warned that the Fed may have to pay a higher economic price to control inflation. Some American scholars said that in the context of the Fed's continued interest rate hikes, it is unlikely that the U.S. economy will eventually achieve a soft landing. Fed policymakers' expectations of "inflation returning to target and unemployment not exceeding 4%" are only justified under fairly optimistic assumptions.

The two economists now predict that the U.S. unemployment rate may need to reach 7.5%, twice its current level, to end high inflation in the U.S. -- which would mean about 6 million people in the U.S. will lose their jobs. According to the Fed's June forecast, the median unemployment rate in the United States will only rise to 4.1% by 2024, when inflation will have returned to the Fed's target level of about 2%.

In addition to higher unemployment, the Fed's continued rate hikes will bring turmoil to emerging market countries. Maurice Obstfeld, a former IMF chief economist, believes that many emerging market and developing economies will face difficulties as the dollar rises on interest rate hikes as governments and businesses accumulate large amounts of dollar bonds during the pandemic.

The red flags are already flashing, and the tightening phase of the global financial cycle is now underway. But Obstfeld also warned that if the Fed fails to control inflation, other risks will emerge. In the long run, this will wreak havoc on the global economy and could undermine the dollar's status as the world's main reserve currency.

Federal Reserve Chairman Jerome Powell made another hawkish speech on Thursday, saying the Fed needs to take decisive and forceful action on inflation. Need to keep going until the fight against inflation is done. As planned, this was Powell's last utterance before the Fed meeting this month. At present, the market expects that the September Fed meeting is likely to decide to raise interest rates by 75 basis points for the third consecutive time.

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