Kavan Choksi Fears Only Recession Will Quench Inflation

Kavan Choksi suggests that the United States' big interest rate hike, the Federal Reserve's actions, and other emerging threats are fueling fears that the only way out of the spiraling price increases that are devouring the American people is a full-fledged recession.

The Fed is still optimistic that it can limit activity and demand, lowering inflation without causing the world's greatest economy to crash. However, Kavan Choksi notes cynicism about the odds of achieving this is mounting. The central bank raised the standard borrowing rate by three-quarters of a point, the largest increase in nearly 30 years, and hinted that another boost could come in July.

Kavan Choksi explains the Fed benefits from a solid job market and strong consumer demand, which are aided by a large stockpile of savings, and might support activity even as the economy cools.

Increased Unemployment

With the Fed's turn to an aggressive tightening of lending conditions — which policymakers expect to rise to 3.8 percent next year — the best officials can hope for right now is a "softish" landing, which would result in increased unemployment.

The economy has continued to create jobs at a rate slightly higher than before the pandemic, and there are roughly two job opportunities for every unemployed person, compared to 1.3 before COVID-19.

Increasing Dangers

A long-time Fed observer, Grant Thornton's Diane Swonk, described the central bank's prognosis as "fanciful." Standard Chartered Bank's Steve Englander, a former Fed economist, predicted that the conclusion would be "painful, even if it isn't a technical recession," defined as two-quarters of negative GDP. "The probability of a recession is growing, increasing rapidly," he warned. But, according to Bostjancic, if drastic action isn't taken to keep prices in check, the U.S. might suffer a situation referred to as stagflation, which was last witnessed in the 1970s and 1980s.