As the US faces its highest level of inflation in 40 years and aggressively raises its benchmark interest rate, the US Congressional Research Service (CRS) has issued a warning about concerns about a hard landing.
According to the CRS on the 3rd, the CRS recently revealed this in a report titled ‘Where is the US economy heading among soft landing, hard landing, and stagflation?
The US economy recorded negative growth of -1.6% on an annualized basis after ending six consecutive quarters of positive growth in the first quarter.
In addition, as the consumer price index (CPI) surged 8.6% in May, the highest since the end of 1981, the US central bank, the Federal Reserve, raised the key interest rate by 0.75 percentage points last month at a time and predicted a further increase. state
Not so long ago, the Fed had not abandoned its hopes of a soft landing with a modest rise in unemployment amid positive growth.
This is reflected in the economic outlook of the Fed’s leadership that inflation will fall to 2.6% in 2023 and unemployment will remain below 4%, the CRS said.
Fed Chairman Jerome Powell even referred to a ‘soft landing’ as of May on the basis of strong labor market conditions.
However, the market’s doubts persisted, and Chairman Powell said on the 22nd of last month that “it is definitely a possibility” and there is no intention to cause a recession, but “the possibility exists and a soft landing is very challenging.” said state.
“A rise in unemployment is necessary to quickly remove inflationary pressures on a significant scale,” the CRS said. “Soft landings are rare.”
Although Chairman Powell once mentioned that soft landings were successful after monetary tightening in 1965, 1984 and 1994, the CRS notes that “inflation was low in 1965 and 1994, and the (notably high) 1984 Personal Consumption Expenditure (PCE) Price Index” It was below the standard of 5%,” he pointed out, pointing out the difference from the present.
“It wasn’t necessarily causation and there was a lag in some, but all recessions since the 1950s have occurred after a long period of interest rate hikes,” the CRS said. did.
High inflation but low unemployment is evidence that demand is too high, and that it is difficult to reduce demand without a hard landing in this situation.
CRS said that since the previous recession in the US economy occurred in 2020, at the early stage of the spread of COVID-19, if a hard landing occurs, it will be a ‘double-dip recession’.
A double dip is a phenomenon in which the economy enters a recovery period after a recession and then retreats again.
If the double-dip becomes a reality, it is a rare case of 40 years since the second oil crisis in the early 1980s.
CRS explained that the situation at the time and now is similar, and that the early 1980s was the last period when inflation exceeded 7% until this year, and that even at that time, the Fed raised interest rates to over 19% to keep up with inflation, and a recession occurred.
The CRS also warned that if the Fed does not raise interest rates quickly because of concerns about a hard landing, it could face a worse situation of stagflation.
If expected inflation stiffens, the relationship between inflation and the unemployment rate weakens, and stagflation, similar to the 1970s, may occur when prices are high and unemployment occurs in an economic downturn.
The CRS pointed out that it is important that the Fed is willing to raise interest rates as much as necessary to keep inflation under control, noting that it is important to prevent fixed inflation expectations in relation to the future direction of US policy.
/yunhap news
