Want to bring down inflation? The great dilemma is this: The only real options are to be patient, or cause a recession.
why it matters: It is a pick-your-poison environment for the Biden administration and the Federal Reserve, who face public discontent about economic conditions — and the risk that discontent would only get worse if the alternative was a new recession.
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The inflationary pressures from strained supply chains and labor shortages look likely to persist through 2022 and maybe beyond.
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But the measures that would be needed to bring inflation down more rapidly would risk sending the economy into a tailspin.
The big picture: In the decades after World War II, episodes of inflation have ended when the Fed took steps to tighten the money supply, causing recessions.
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In other words, companies can’t hike prices and workers can’t demand higher pay if the economy is contracting and more people are out of work.
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In the most extreme example, Fed Chair Paul Volcker engineered a steep downturn in the early 1980s that ended the double-digit inflation of that era — but at the cost of double-digit unemployment that pummeled President Reagan’s popularity.
this time around, the goal is a soft landing. The Fed is looking to move toward higher interest rates gradually, not with the kind of shock Volcker engineered.
Yes, but: Patience is a virtue, but not necessarily in politics. High inflation is hammering President Biden’s approval ratings, and could cost Democrats big in November mid-term elections.
The bottom line: Inflation hurts. Recessions can hurt more. Ultimately, economic policymakers are betting that tolerating some pain now in hopes that conditions look better in a year or so is safer option.
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