By James Pethokoukis

Yes, there was an obvious political motivation at play when Republicans in Washington first started comparing President Joe Biden to former President Jimmy Carter. Of course, it’s hardly uncommon for one side to compare the other side to unpopular politicians of the past. (For decades in the 20th century, Democrats would remind voters that Herbert Hoover was a GOPer.) But the charge only has staying power if it at least somewhat plausibly reflects reality.

And some economists — though perhaps not ones active on EconTwitter — thought reality might eventually catch up to the accusation. They worried the inflation surge that started last year might become a regular thing. Back in January at his Senate confirmation hearing, Federal Reserve Chairman Jerome Powell gave a pretty good explanation of the stakes:

If inflation does become too persistent, if these high levels of inflation get entrenched in our economy and in people’s thinking, then inevitably that will lead to much [higher rates] from us. And it could lead to a recession, and that would be bad for workers. So, really, achievement of maximum employment, by which we really mean continued progress in hiring and participation, is going to require price stability. High inflation is a severe threat to the achievement of maximum employment.

Boomflation — fast economic and/or job growth with fast-rising prices — is tough to sustain. As I wrote back in February:

Unfortunately, boomflation may not be sustainable because of one of the most basic economic principles: the Law of Demand. When the price of a good rises, consumers will demand less of it. And right now, prices are rising for a broad range of goods — from appliances to cars to gas to clothing. And if consumers don’t keep tolerating rising prices, they’ll start spending less on all sorts of things. And that means less revenue for businesses, who’ll then start spending and hiring less. And if the profit outlook changes for lots of companies, investors will start selling.

Again, the concern was that sustained inflation would create a higher risk of recession. And how do things stand now? One can certainly point to a variety of market indicators, including the yield curve — suggesting increased recession risk. One of the clearer narratives about how it all might go down has been supplied by William Dudley, former president of the New York Fed. In a new Bloomberg column, Dudley takes issue with the notion that we should take some comfort from past successful Fed efforts to engineer a soft landing — to raise interest rates and lower inflation without pushing up unemployment.

But Dudley advises caution with those historical examples. From the column:

The current situation is very different. Consider the starting points: The unemployment rate is much lower (at 3.8%), and inflation is far above the Fed’s 2% target. To create sufficient economic slack to restrain inflation, the Fed will have to tighten enough to push the unemployment rate higher. Which leads us to the key point: The Fed has never achieved a soft landing when it has had to push up unemployment significantly. This is memorialized in the Sahm Rule, which holds that a recession is inevitable when the 3-month moving average of the unemployment rate increases by 0.5 percentage point or more. Worse, full-blown recessions have always been accompanied by much larger increases: specifically, over the past 75 years, no less than 2 percentage points.

The Powell Fed might still pull off a soft landing. We should pray for its success. After the chaos of the past two years, a long, strong, and steady expansion would be most welcome.

The post Thinking (worrying, actually) about the chances of a US recession appeared first on American Enterprise Institute – AEI.