The former head of the Federal Reserve says the US is heading toward a period of high inflation and low economic growth as the head of Goldman Sachs and other global banks warn that a recession is coming.
Ben Bernake, who led the Fed through the 2008 financial crisis, says ‘stagflation’ may be on the horizon.
The term, coined in the 1960s, refers to low economic growth combined with high unemployment and high prices.
The phenomenon was a notable feature of Jimmy Carter’s presidency in the 1970s, when the US experienced a ‘supply shock’ after oil-producing nations raised their prices.
Economists use three variables to measure it: gross domestic product (the market value of all goods and services made in a country) unemployment and inflation (a decrease in the buying power of money.)
Stagflation happens when the first is down and the last two are up.
Meanwhile, the chairman of Goldman Sachs says the risk of the US falling into a recession is ‘very, very high.’
Before that, it was believed that high inflation and high unemployment were not possible at the same time.
But economists now believe that a ‘negative supply shock’ can cause that. Such a shock happens when a crucial good, such as energy or labor, is suddenly in short supply.
The US underwent a similar shock during the pandemic. Over the last two years, people lost their jobs, goods and services stopped being produced at the same rate and people collected massive unemployment benefits.
Bernake says COVID-related disruptions delayed production on his own upcoming book, ’21st Century Monetary Policy: The Federal Reserve From the Great Inflation to Covid-19.’
Given supply-chain disruptions, this book took six months to go from final manuscript to appearing in the store,’ he said.
The Federal Reserve, which Bernake led for eight years, maintained interest rates at near-zero during much of the pandemic in order to increase borrowing and spending. The move has likely contributed to surging prices.
The central bank is now slowly raising rates in order to make borrowing more expensive, discourage spending and allow supply to catch up with demand, but the belt-tightening could trigger a recession in of itself.
Inflation in the US hit 8.3 percent in April, falling slightly from the four-decade high it reached in March and breaking a streak of seven consecutive monthly increases in the annual rate of price increases.
The latest inflation report marks a mixed bag of news for consumers, showing that grocery prices are rising at their fastest annual rate in 42 years and flashing other signals that inflation is becoming more entrenched.
Gas prices have also soared, reaching an average of $4.48 per gallon on Monday, per the AAA.
Unemployment, however, has gone back to pre-pandemic levels, with new claims for the week ending April 30 falling by 44,000 from the previous week to 1,343,000. That’s the fewest since January 3, 1970.
Still, Bernake believes that ‘stagflation’ could happen.
He’s also concerned about the Fed’s credibility as it deals with the unusual economic circumstances of the past two years, given that inflation can quickly become a political wedge issue.
‘The difference between inflation and unemployment is that inflation affects just everybody,’ he told the Times.
‘Unemployment affects some people a lot, but most people don’t respond too much to unemployment because they’re not personally unemployed. Inflation has a social-wide kind of impact.’
On Sunday, Goldman Sachs chairman Lloyd Blankfein warned that the US is on its way to a recession.
‘If I were running a big company, I would be very prepared for it,’ Blankfein said on CBS’s Face the Nation, according to the Daily Wire. ‘If I was a consumer, I’d be prepared for it.’
Last month, Fannie Mae economists predicted that the country will enter a ‘modest recession’ next year. Bank of America and Deutsche Bank have also predicted a recession.
The current head of the Federal Reserve told Americans to expect ‘some pain’ as the central bank works to bring down inflation by raising interest rates.
Higher interest rates make it slightly more expensive to borrow money, which in theory would stop people and businesses from buying things and give supply a chance to catch up to demand, potentially bringing prices down.
In an interview with Marketplace, Fed chair Jerome Powell was asked what he would say to someone who will lose their job or miss out on a pay rise as the Fed tried to choke off inflationary spending.
‘So I would say that we fully understand and appreciate how painful inflation is, and that we have the tools and the resolve to get it down to two percent, and that we’re going to do that.
‘I will also say that the process of getting inflation down to two percent will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like.
‘And that’s just people losing the value of their paycheck to high inflation and, ultimately, we’d have to go through a much deeper downturn. And so we really need to avoid that.’