Interview
How Policymakers are Navigating Stagflation Risk
- Eric Rosengren predicts the Federal Reserve is behind the curve on inflation above the 2% target, forecasting real interest rates must remain positive and rates "a little above neutral," with a pivot "probably" occurring earlier in spring or summer rather than an abrupt shift later; he warns that rapid rate hikes could dramatically increase recession probability in the second half of the year, while noting that recalibrating the balance sheet may be more effective than short-term rate hikes for slowing long-term purchases without harming credit availability, though risks remain elevated from oil prices, the Ukraine situation, and potential fall COVID variants.
- Jan Hatzius projects a "soft landing" scenario where growth slows to a 2% pace and slightly below that, assuming the federal funds rate reaches around 3% by the end of next year, while anticipating a peak rate in the 3% to 3.25% range that exceeds current market pricing; however, he estimates the risk of a recession over the next one to two years has increased due to fiscal drag between one and three percentage points, geopolitical uncertainties, and the rising likelihood of policy-induced recessions rather than traditional organic ones, despite the possibility of an adverse COVID shock.
- Philip Hildebrand expects the European growth hit to be approximately 2% to 3% of points, bringing the region close to stagflation, with the potential for a significantly larger impact if energy supplies are disrupted; he argues central banks cannot effectively ease policy as inflation may drift higher and become more persistent, necessitating a normalization process that is "shallower than in the past" and "muted" because fully reducing supply-driven inflation would require causing excessive damage to growth, leading to an inevitable outcome where central banks must "live with higher inflation."