Former Obama Economic Advisor Doubts a Recession Would Cure Inflation

Former Council of Economic Advisers Chairman Jason Furman speaks during a forum held by Democratic members of the House Ways and Means Committee discussing Republican tax legislation and the U.S. economy, in Washington on Dec. 13, 2017. (Zach Gibson/Getty Images)

There is rising concern in Washington that interest rate hikes by the Federal Reserve will spark a recession in the United States within the next year.

However, some are saying that even a recession caused by the actions of the central bank may not be enough to curtail inflation.

The former chair of former President Barack Obama’s Council of Economic Advisers, Jason Furman, spoke to MarketWatch on May 24 at the World Economic Forum in Davos.

Furman said he is concerned about the fiscal aftermath of the Biden administration’s pandemic stimulus package on inflation.

He said that while the administration’s American Rescue Plan helped the U.S. economy make a quick recovery, it was also partly responsible for the recent high inflation and he did not have a good word for the second fiscal stimulus package passed last year.

He also believes that investors are failing to realize how aggressive the central bank will need to be to fight inflation, as he predicts a terminal rate above 4 percent for the Fed funds rate.

“I looked at the 10 year Treasury, and I think it’s shocking,” said Furman to MarketWatch, continuing that “the yield on it is that essentially saying we just don’t believe the Fed’s going to go above 4 percent, and we think it’s actually going to come down [afterwards] and stay down. And that’s the only way to make sense of it.”

He said that the increase in 10-year Treasury rates poses a serious risk to the future of technology stocks, which have been heavily battered lately after the Nasdaq Composite dropped 29 percent from its peak.

Furman, on Face the Nation on Sunday, urged Democrats to drop the anti-price gouging bills in Congress, explaining that they will do very little to bring down inflation and could even worsen the supply shortages by calling such bills “gimmicky.”

“I think it is pretty gimmicky, these price gouging bills, because you know, you’ve got a lot of extra demand,” he said while asking, “what happens when demand goes up? Prices go up.”

“There is an old saying, the cure for high prices is high prices,” said Furman.

“That’s a little bit of a painful thing to deal with, but it is what elicits the additional supply, it brings more producers into the market, and it is what brings prices down” the economist continued.

The former Obama economic advisor said that the markets are too unrealistic to expect inflation to settle at a normal rate after the recent spike, referring to several upticks in inflation throughout the 1970s.

“We need to let that process work, you try to interfere with it, you are going to make things worse. We tried that in the 70s, it was a big failure. We shouldn’t be repeating it again,” he concluded.

Inflation hit another record in April, according to a Labor Department report last week, with the consumer price index rising by 8.3 percent, but below the 41-year high in March, when it hit 8.5 percent.

The average American is paying an extra $311 a month due to rising inflation, with the cost of everyday goods, including cars, rent, food, gasoline, and health care on the rise, according to a recent Moody’s Analytics report.

Furman criticized the central bank for “a bunch of mistakes” after President Joe Biden’s plan was signed into law in March 2021 and said that “[The Fed] was behind the curve for most of last year.”

“It kept thinking the inflation was transitory, it kept not moving to normalize rates, and now you add on top of that President Putin’s invasion of Ukraine, and that’s like the cherry on top of this terrible concoction we already had.”

However, the former WH economic advisor said he was in favor of confirming Federal Reserve Chairman Jerome Powell for his second term, even though he blames the chair for being about six months behind the curb to fight inflation.

Furman still credited Powell for doing a “spectacular” job in his first term and said that he deserves acclaim for managing the economy when the pandemic broke out in 2020.

Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled "The Semiannual Monetary Policy Report to the Congress" in Washington on March 3, 2022. (Tom Williams/Pool via Reuters)

He said he also appreciated the Biden administration’s hands-off approach to the Fed and for the quality of the recent appointees to its board of governors.

Furman did criticize Biden’s policy of deferring student loans, which probably increased inflation by a few tenths of a percent when cutting tariffs on China could have lowered them by a half-point.

“If I were in the White House right now, I would tell the message people, whatever message we craft, it has to recognize two facts that are true,” he said.

“One is that inflation will remain high, and the second is that it is really impacting working Americans.”

“I don’t think there’s a great message. The only great message will be when inflation actually comes down,” said Furman.

While he says a recession is still possible, Furman said he expects above-trend jobs growth to continue along with slower economic growth this year.