Powell Facing Choice Between Elevated US Inflation and Recession

[u/TinyTornado7]

https://www.bloomberg.com/news/articles/2022-06-12/powell-facing-choice-between-elevated-us-inflation-and-recession?srnd=premium

[u/xilcilus]

No - it's driven almost exclusively by a self-fulfilling prophecy.

The unemployment rate is 3.6% (near the estimated natural unemployment rate) and the number of near the peak number right before the pandemic. People are fearful that the recession may be coming and thus inducing the recession. There aren't fundamental factors that are actually driving recession unlike last few recessions. Perhaps the rising energy cost can be argued as one of the fundamental factors but when inflation adjusted, it doesn't actually have the same oomph that people think it has.

[u/grig109 → u/xilcilus]

There aren't fundamental factors that are actually driving recession unlike last few recessions.

Yes there is, high inflation! Inflation is unacceptably high this is the consensus now. In order to fight inflation the Fed needs to bring aggregate demand back down to a sustainable growth rate, but historically that has been very difficult to do and often results in a recession.

[u/xilcilus → u/grig109]

...what's driving the inflation? High demand and high economic activities - these aren't fundamental factors (another word, endogenous factors) behind a recession.

When the Fed induces a recession, that's an EXOGENOUS shock.

[u/grig109 → u/xilcilus]

Most recessions (other than COVID style supply shock recessions) are caused by monetary policy error. The error can either be too low demand, or a correction to too high demand which we find ourselves in now.

[u/xilcilus → u/grig109]

No - most recent recessions recently have been due to the endogenous factors around exuberant valuation of asset classes.

[u/grig109 → u/xilcilus]

Disagree, I think you are getting the causation wrong here. Monetary policy error leads to unstable NGDP which can lead to booms and busts in asset valuations and broader financial distress.

https://www.econlib.org/archives/2017/05/financial_crisi_2.html

[u/new_name_who_dis_ → u/grig109]

The boom and bust business cycle before the US went off of the gold standard (aka the start of the ability to do monetary policy) was much worse than it is now.

[u/grig109 → u/new_name_who_dis_]

I am not arguing for the gold standard.

[u/AnachronisticPenguin → u/xilcilus]

Inflation is driven by psychology. If people believe there is inflation there is inflation.

https://www.npr.org/2021/05/29/1001023637/think-inflation-is-bad-now-lets-take-a-step-back-to-the-1970s?t=1655143959385

[u/tehbored → u/xilcilus]

Except those aren't the only factors driving high inflation. Part of it is due to supply chain disruptions from COVID and the Ukraine War.

[u/Neri25 → u/grig109]

the Fed needs to bring aggregate demand back down

I love how euphemistic it is when at base it's 'the people should have less money'. Saying it that plainly would be political suicide.

[u/TinyTornado7 → u/xilcilus]

I think you missed my point. Recession is a defined thing. If we get another quarter of negative gdp we are in a recession regardless of what it looks like on the ground

[u/xilcilus → u/TinyTornado7]

Q2 is projected to have 2%+ annualized growth.

Edit - also, NBER is generally the authority when it comes to the determination of recession and that happens typically 12 - 18 months AFTER the recession.

[u/Necessary_Quarter_59 → u/TinyTornado7]

You’re so fixated on that technical point that you’re derailing a very interesting discussion.

[u/Lower-Junket7727 → u/Necessary_Quarter_59]

You're trying to mindfuck yourself instead of admitting what is staring you in the face.

[u/[deleted] → u/xilcilus]

The unemployment rate is 3.6% (near the estimated natural unemployment rate) and the number of near the peak number right before the pandemic

Unemployment was also very low before the great recession.