The U.S. Federal Reserve’s attempts to quell inflation will not be adequate to spare the economy from a recession, Randal Quarles, the Fed’s former vice chair for supervision, said.
“Given the intensity of inflation, the degree to which unemployment has been driven down—to bring that back into an equilibrium, it’s unlikely the Fed is going to be able to manage that to a soft landing,” he said last week on the “Banking with Interest” podcast.
“The effect is likely to be a recession,” he added.
Quarles retired from the Fed at the end of last year when his term expired.
The central bank would have moved sooner against inflation if it had known sooner that president Joe Biden was going to reappoint Jerome Powell as chair.
“Had clarity been provided, I think the Fed would have acted earlier,” Quarles said. However, Biden “didn’t do that for a number of months.”
By last September, it was “pretty clear” that the Fed needed to act, he said.
“We would have been better served to start getting on top of it in September,” Quarles said. “That was hard to do until there was clarity as to what the leadership of the Fed was going to be.”
Biden reappointed Powell to a second term as Fed head last November.
In December, Powell downplayed the idea that he had steered the bank away from aggressive action, which might have tanked the equities market or sparked a recession, in hopes of being reappointed.
The future is no less uncertain now, Quarles noted.
“For an economy that has accustomed itself to interest rates as low as they have been for as long as they have been, it doesn’t take a very large nominal increase in interest rates to be a very significant percentage of debt service for a number of heavily indebted actors,” he said. “The effect on the economy could be fairly strong.”
Still, Quarles expressed confidence that “the Fed will get on top of inflation.”
In March, Powell said in Congressional testimony that “it’s more likely than not that we can achieve what we call a soft landing, and they’re far more common in our history than is generally understood.”
TREND FORECAST: As we have noted, despite inflation concerns, the deeper and faster equity markets sink, the slower the Fed may choose to raise rates. And as noted in the past few days, many commodity prices have weakened as fears persist that China, the world’s second largest economy, is slowing down… and so too are the economies across both developed and emerging markets.