By Steve Goldstein
There’s increasing talk that the Federal Reserve’s interest rate hikes will cause a U.S. recession next year, but even a recession induced by the central bank might not be enough to tamp down inflation.
That’s according to Jason Furman, the former chair of President Obama’s Council of Economics Advisers and one of the few on the political left who warned about the inflationary consequences of President Biden’s fiscal stimulus package introduced last year to help the economy recover from the coronavirus pandemic.
Speaking with MarketWatch on the sidelines of the World Economic Forum in Davos, Furman said that a concept called the Sacrifice Ratio measures how many years of unemployment would cause the inflation rate to fall by one percentage point. And in the 25 years before the pandemic, the Sacrifice Ratio has been six percentage points — meaning one year of a 6 percentage point jump in unemployment, or two years of a 3 percentage point increase in the jobless rate, would be required to knock down inflation by a full percentage point.
Furman also said markets may be unrealistic in expecting inflation to settle at a normal rate after one bad spell. In the 1970s, for instance, there were several inflation spikes. Markets also are misjudging just how aggressive the Fed will need to be as he forecasts a terminal rate above 4% for the Fed funds rate.
“I looked at the 10 year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.35% , and I think it’s shocking,” said Furman. “The yield on it is that essentially saying we just don’t believe the Fed’s going to go above 4%, and we think it’s actually going to come down [afterwards] and stay down. And that’s the only way to make sense of it,” he said. Furman said his view of the 10-year Treasury would pose further risks to technology stocks that have already been battered, as the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.35% has dropped 29% from its peak.
Furman said the U.S. Senate was right to confirm Federal Reserve Chair Jerome Powell for a second term, even as he says Powell was about six months too late in pivoting to fight inflation. Powell did a “spectacular” job in 2019 and also deserves credit for his firefighting when COVID-19 broke out. And Furman said the Biden administration should get credit for its hands-off approach to the Fed and for the quality of candidates it’s nominated.
Furman participated in a World Economic Forum event on the U.S. economy that got sidetracked by a vigorous debate about cryptocurrencies. Furman is of the belief that the value of cryptocurrencies is not “much above zero.” “There’s no reason to expect higher returns indefinitely on something where the supply of it is infinite,” he said. He also said it’s unsurprising that cryptocurrencies have proven to be a terrible inflation hedge.
The general view on that panel, which also included Nasdaq CEO Adena Friedman, Sen. Pat Toomey and PayPal CEO Dan Schulman, was that the U.S. economy would escape a recession even as inflation continued to rage. While he says a recession is possible, Furman said he expects above-trend jobs growth and below-trend economic growth as productivity normalizes.
CEOs that Furman talks with are discussing the job market more than inflation. With aggressive wage growth for low-skilled workers, some executives are looking at hiring more skilled workers and give them broader tasks.
“I don’t think we have a Great Resignation, and much more, I think we have a resorting. People are matching to different types of jobs, different wages, different benefit packages,” said Furman. He also points out that it’s now much easier for employees to be interviewing for other positions, using tools like Zoom to find prospective employers.
He said the Biden administration’s policy of deferring student loans has probably increased inflation by a few tenths of a percent, while a cutting of China tariffs could lower them by a half point. But he didn’t have hopeful words after the Biden team’s “original sin” of supporting the second fiscal stimulus package last year. “If I were in the White House right now, I would tell the message people, whatever message we craft, it has to recognize two facts that are true,” he said. One is that inflation will remain high, and the second is that it is really impacting working Americans. “I don’t think there’s a great message. The only great message will be when inflation actually comes down,” he said.