The Fed has touched off recessions with past rate increases: It happened in the early 1980s, when Paul Volcker raised rates in a campaign to bring down very rapid inflation and sent unemployment rocketing painfully higher in the process.
“There is no guarantee that there will be a recession, but you have high inflation, and if you’re serious about bringing it down quickly, you have to hike a lot,” said Roberto Perli, the head of global policy at Piper Sandler, an investment bank, and a former Fed economist. “The economy doesn’t like that. I think the risk is substantial.”
It is no surprise that it can be difficult to cool down inflation while sustaining an economic expansion. Higher borrowing costs trickle through the economy by slowing the housing market, discouraging big purchases and prompting companies to cut expansion plans and hire fewer workers. That broad pullback weakens the labor market and slows wage growth, helping inflation to moderate. But the chain reaction plays out gradually, and its results can only be seen with a delay, so it is easy to lay on the brakes too hard.
Understand Inflation in the U.S.
- Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.
- Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.
- Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.
- How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.
- Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.
“No one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context,” Mr. Powell acknowledged during his remarks this week, adding, “My colleagues and I will do our very best to succeed in this challenging task.”
Six of the eight Fed-rate-increase cycles since the early 1980s have ended in recession, though some of those were caused by external shocks — like the pandemic — and some by asset bubble implosions, including the 2007 housing crisis and the collapse in internet stocks in the early 2000s.