Biden’s top economic adviser on inflation, interest rates and possible recession
PBS NewsHourJUL 2023
Deliberately slowing the economy and increasing unemployment in order to tackle inflation makes no sense and reflects a callous disregard for its destructive impact on the lives of millions of people. Most estimates say US unemployment will have to reach as high as 7.5%, more than double its current level, to get inflation down to the Fed’s target of 2%. The wage-price spiral theory doesn’t explain the current rise in prices. Wage increases can’t be driving inflation as they are continuing to lag behind it.
High employment and strong retail sales are undermining the Fed's efforts to tame inflation. As long as the labor market remains tight, workers remain in a strong bargaining position and can command higher wages, which in turn fuels strong consumer spending. This means that interest rates must continue to be raised aggressively now, probably well above 5%, in order to increase unemployment, until inflation is finally defeated. Failure to tackle inflation now would risk a replay of the 1970s, when inflation in the US peaked at 12%.