The former head of the Federal Reserve says the US is heading for a period of high inflation and low economic growth as the head of Goldman Sachs and other global banks warns of an impending recession.
Ben Bernick, who led the Fed during the 2008 financial crisis, says “stagflation” may be looming.
“Even under the benign scenario, we should have a slowing economy,” he said The New York Times Average prices are up 8.3% from last year.
Inflation is still very high, but it is declining. So there has to be a period in the next year or two where growth is low, unemployment is up at least a little bit and inflation is still high. So you can call this stagflation.
Stagflation, a term coined in the 1960s, refers to low economic growth combined with high unemployment and high prices.
The last time the United States went through such a period was in the 1970s, after the oil “supply shock”.
The Covid-19 pandemic has triggered a similar shock in terms of employment and production, with factories temporarily shutting down assembly lines and companies laying off workers in droves.
The Fed tried to manage the shocks by cutting interest rates to encourage borrowing and spending, which led to a sharp rise in rates the central bank is now trying to rein in by raising interest rates again. Belt tension can cause slack in and of itself.
Meanwhile, Goldman Sachs Chairman said the risk of the US falling into a recession is “extremely high”.
Ben Bernick led the Federal Reserve until 2014. He warns that a period of low economic growth, high prices and unemployment, dubbed “stagflation,” could come
Inflation in the United States is still high but has fallen slightly from the record four-decade level set in March
Gas prices also rose. Rising crude oil prices led to the last period of stagflation in the United States in the 1970s
President George W. Bush nominated Bernick, 68, to head the Federal Reserve.
The economist and MIT graduate served as head of the central bank from 2006 to 2014.
He warns that a period of “stagflation” may soon come.
Stagflation occurs when high prices and high unemployment offset low economic growth, according to Conversation.
Economists use three variables to measure this: GDP (the market value of all goods and services made within a country), unemployment, and inflation (a decrease in the purchasing power of money).
In the 1970s, oil-producing countries pushed prices up. Countries like the United States that import a lot of oil have suffered from stagnation and inflation.
The price of crude oil doubled from 1973 to 1975. Unemployment rose from 4.6 percent in 1973 to 9 percent in 1975.
The cycle repeated itself a few years later. The CPI rose to 11.1 per cent in 1974 and then returned to a higher of 13.5 per cent in 1980.
The economy was officially in recession from 1969 to 1970 and from 1973 to 1975, according to Investopedia.
Jimmy Carter (second from left) was president when the United States went through the last stagflation. The consumer price index reached its highest level at 13.5 percent in 1980. It has now reached 8.3 percent
Inflation has risen steadily over the years but reached a 40-year high last month. Experts warn that the United States may be within two years of high prices and relatively high unemployment
Bernacki says supply chain shocks have faced the US with production delays for his upcoming book
Prior to this, it was believed that high inflation and high unemployment were not possible at the same time.
Economists now believe that a “negative supply shock” can cause this. Such a shock occurs when there is a sudden shortage of an essential good, such as energy or labour.
The United States was hit by such a shock during the pandemic. Over the past two years, people have lost their jobs, the production of goods and services has stopped at the same rate, and people have collected massive unemployment benefits.
Bernick says the shock has delayed production of his upcoming book, “Monetary Policy for the Twenty-first Century: The Federal Reserve from Hyperinflation to COVID-19.”
“Due to supply chain disruptions, it took this book six months to go from final manuscript to appearing in store,” he said.
The Federal Reserve, which he led for eight years, has kept interest rates near zero for most of the pandemic in order to increase borrowing and spending. This move likely contributed to the price hike.
US inflation was 8.3 percent in April, down slightly from a four-decade high reached in March, and breaking a string of seven consecutive monthly increases in the annual rate of price increases.
Goldman Sachs President Lloyd Blankfein believes that the United States is on its way to a recession
The latest inflation report presents a mixed bag of news for consumers, showing grocery prices rising at their fastest annual rate in 42 years and flashing other signs that inflation is getting more entrenched.
Gas prices are also up, too, averaging $4.48 a gallon on Monday AAA.
With that said, unemployment is back to pre-pandemic levels, with new claims for the week ending April 30 down 44,000 from the previous week, to 1,343,000. This is the lowest number since January 3, 1970.
However, Bernick believes that “stagflation” can occur.
He is also concerned about the Fed’s credibility as it has been dealing with unusual economic conditions in the past two years, given that inflation could quickly become a political wedge issue.
“The difference between inflation and unemployment is that inflation affects just everyone,” he told The Times.
Unemployment affects some people a lot, but most people don’t respond much to unemployment because they are not personally unemployed. Inflation has a wide social impact.
On Sunday, Goldman Sachs Chairman Lloyd Blankfein warned that the United States was on its way to a recession.
“If I was running a big company, I would be very prepared for it,” Blankfein said on CBS’s Face the Nation. daily wiring. If I were a consumer, I would be prepared for that.
Last month, Fannie Mae economists predicted that the country would enter a “modest recession” next year. Both Bank of America and Deutsche Bank predicted a recession.
The current Fed chair told Americans to expect “some pain” as the central bank works to bring down inflation by raising interest rates.
Higher interest rates increase the cost of borrowing money a little, which in theory will prevent people and companies from buying things and give supply a chance to catch up with demand, which can lead to lower prices.
In an interview with the shopFederal Reserve Chairman Jerome Powell was asked what he would say to someone who would lose a job or lose a pay raise while the Fed tries to stifle inflationary spending.
So I would say that we fully understand and appreciate how painful inflation is, that we have the tools and the determination to bring it down to 2%, and that we’re going to do it.
I will also say that the process of bringing inflation down to 2% will also involve some pain, but in the end it will be even more painful if we fail to deal with it and inflation is entrenched in the economy at high levels, and we know what that is like.
And that’s just people losing the value of their paychecks because of high inflation, and in the end, we’re going to have to go through a much deeper downturn. And so we really need to avoid that.
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