NEW YORK, Feb 25, 2023 (BSS/AFP) - There is no recent precedent for a central
bank successfully defeating inflation without "substantial economic sacrifice
or recession," said a report presented Friday to Federal Reserve
policymakers.

The report, prepared in connection with a seminar organized by the University
of Chicago's Booth School of Business, came after fresh US pricing data
suggested the Fed's aggressive moves thus far have been only partially
successful.

The Booth analysis suggested a potentially rocky future for the US economy,
which has thus far shown resilience despite aggressive Fed actions to counter
inflation.

Citing historical "disinflation" cases dating back to 1950 in major
economies, the report concluded that central banks "are likely to be hard
pressed to achieve their disinflationary goals without significant sacrifice
in economic activity."

The analysis, prepared by a team of academic and corporate economists,
identified parallels between the current climate and that of the late 1970s
when former Fed Chair Paul Volcker radically increased interest rates to
counter soaring inflation.

As with the earlier period, the Fed in the recent episode also "fell behind
the curve," the report said.

The Volcker case "shows how costly disinflation can be once a central bank
has lost credibility for controlling inflation," said the report, which also
recounted the bruising consequences, including more than 10 percent
unemployment in the 1980s.

Recent robust US jobs and retail sales data do not show anything like that
right now. But the Booth report predicted the Fed "will need to tighten
policy significantly further to achieve its inflation objective by the end of
2025."

Philip Jefferson, a member of the Fed's Board of Governors, acknowledged the
importance of looking at history, but highlighted the "unprecedented" nature
of the pandemic that has made the current period distinct.

Economic models "while still useful in many respects, are going to have
limited applicability," he said in prepared remarks.

Such tools "need to be used with careful interpretation and judgment when
history does not speak to the current situation," Jefferson said.

"Sound decisionmaking requires that their findings be complemented with
additional analytical tools, including careful scrutiny of real-time data."

A second Fed official, Loretta Mester, president of the Federal Bank of
Cleveland, suggested the US central bank faces a challenging balancing act.

"The level of inflation matters and it's still too high," she said, while
acknowledging later that the US central bank has a history of "overshooting a
bit."