The Reuters headline reads:
Fed needs a recession to win inflation fight, study shows
This was not Reuters referring to countless articles the Mises Institute has published regarding the coming recession. Rather, it was in response to a study a few mainstream economists presented at the University of Chicago on Friday, titled Managing Disinflation. They found that in the last 16 worldwide instances of a disinflation engineered by central banks, there was:
… no instance in which a significant central bank-induced disinflation occurred without a recession.
To recap, disinflation refers to the lowering of (price) inflation rates back to the Fed’s arbitrary 2% target. The Fed fears deflation. They will never want prices to go down; they will always want prices to increase, just not as much as they are now.
While the stat is eye-catching, the last 16 episodes of disinflation “engineered by central banks” doesn’t mean this 17th episode of central bank intervention will trigger the bust. Instead, After the Boom Must Come the Bust, as explained on Radio Rothbard last month. The recession became inevitable three years ago when trillions of dollars were created and many people celebrated a rising stock market and a rise in housing prices (the boom).
Subtle nuance, but notice how the Fed is normally cited as the entity who fixes the economy by disinflation, but never cited as the entity who broke the economy through causing inflation. It follows the formula we’ve seen for gas prices: When gas prices go up, it’s Putin’s fault. When gas prices go down, it’s Biden’s leadership.
The paper continues:
… the cost of lowering inflation to the Fed’s 2% target by 2025 will likely be associated with at least a mild recession.
Lastly, this notion of the policy error was offered:
Perhaps too reliant on the tame inflation of recent decades, the Fed made a “significant error” by not raising interest rates “preemptively” when inflation began accelerating in 2021, the group concluded.
The en-vogue mainstream critique of the Fed is that they made a mistake by raising rates “too late,” implying that a recession could have been averted if only the Fed had acted sooner. But this misses the bigger picture, that the bust (or recession) was set in motion prior to 2021, beginning the moment the Fed intervened in the market.
The same day, Governor Philip N. Jefferson wrote a response to the Managing Disinflation paper. Not much is worthy of repeating, but this excerpt helps illustrate the problem:
The Volcker disinflation of 1981–82 resulted in a painful recession. But the reduction in inflation was large. Thus, measured in terms of percentage points of inflation reduction, as is conventionally done, it was not particularly costly.
Simplified: the Volcker recession was painful, but not costly because the statistical data tells us so.
Mises readers knew a long time ago the inevitability of recession, that there was no policy error. The only thing we can count on is that the Fed will try to fix the problem it created, by doing what it does best, creating more problems to fix.
