The economy is at a critical juncture with recession a possibility, if not a certainty, National Retail Federation chief economist Jack Kleinhenz stated in the NRF Monthly Economic Review.
The United States Federal Reserve’s efforts to reduce inflation may not trigger a recession, but Kleinhenz warns that continuing interest rate hikes increase the chances.
The Fed increased interest rates another one-half percentage point in December of last year even though year-over-year inflation as measured by the Consumer Price Index fell to 7.1% in November, down from 7.7% in October and falling for the fifth consecutive month from a peak of 9.1% in June. Although the interest rate hike was smaller than recent three-quarter-point increases, it took rates to their highest levels in 15 years and demonstrated that the Fed remains focused on inflation.
The Fed’s interest rate hikes are intended to slow the economy and bring inflation under control, but it can take six months or more for monetary policy to have an impact on GDP and 18 months for inflation, the report noted. As such, the results of actions by policymakers aren’t evident until well after implementation, which creates the risk of inducing a recession.
“There are downside risks both in doing too much and too little, and the Fed is well aware that the balance is delicate,” Kleinhenz observed.
Kleinhenz pointed out that there is no simple measure that can significantly reduce inflation and that “the Fed’s job of trying to bring down rising prices without damaging the labor market or the rest of the economy is not enviable.”
