Alan Blinder was one of the most-prominent voices this year to express optimism the Federal Reserve could engineer a soft landing by taming inflation without triggering a recession.

Now the Princeton University economist tells the What Goes Up podcast that he has toned down that optimism a bit, mostly due to a change in the way the government adjusts inflation data for seasonal factors.

Alan Blinder (Bloomberg)

While prices moderated in the second half of last year, they didn’t cool off as quickly as previously indicated by the numbers. That means there’s reason to expect more rate increases, according to Blinder, who served in the 1990s as vice chair of the Fed and a member of the president’s Council of Economic Advisers. Still, he doesn’t see the central bank hiking to 6%, as some in the market are predicting.

Here are some highlights of the conversation, which have been condensed and edited for clarity. Click here to listen to the full podcast on the Terminal, or subscribe below on Apple Podcasts, Spotify or wherever you listen.

Q: We’ve seen renewed concern about inflation. Is there still reason to be optimistic that we’re trending in the right direction? Is this just a pothole on that road to normalization, or is there any reason to be more concerned?

A: It’s more of a pothole — with one big exception, and this is my beef with the Bureau of Labor Statistics, which I usually love. But what they did, this is going to sound very wonkish, is change the seasonal-adjustment factors. It was true that, roughly speaking, inflation in 2022 was about an 11% annual rate in the first half and about a 2% annual rate in the second half. Wow. That’s quite a difference. It’s nothing like that now because of changing the seasonals, which struck me as dirty pool for a prognosticator. I was looking at what turned out to be wrong data. That said, the qualitative story — that of lower inflation in the second half than in the first half — remains true. That did not disappear from the data. It’s also mostly universal — I won’t say every country, but it’s certainly true in Europe and in most other countries. But in terms of magnitude, nothing like what it was before they changed the data. And that’s the sense in which I view it as a kind of a pothole, but a pothole now on a road that’s not as steeply declining as we used to think. But declining. That’s important.

Q: What do you make about the idea the Fed could raise its benchmark interest rate to 6%?

A: I’d bet against that. It’s not beyond the realm of the possible. When I was on the Fed in ancient times in the 1990s, when we were tightening in ‘94, ‘95, market sentiment at one point — not just for a day, but for a while — was that we were going to go up to 8% on the federal funds rate. I remember sitting there in my office in Washington saying, ‘are those people crazy? We’re not going to go anywhere near 8%.’ But in those days, you weren’t allowed to say anything. Those were the days when the Fed was mum, and if the markets flew off in some wild direction, Alan Greenspan, who was the chairman, wouldn’t do anything to bring them back. Eventually events brought them back. And, in fact, we topped out, coincidentally, at 6%. Not 8%. So I’d be surprised if we get to 6%.

Q: What about the idea that the Fed needs to rethink its 2% inflation target?

A: Let me assure you of one thing. There is no debate inside the Fed — none. Zero. It is not going to happen. Bet your whole portfolio on it. The Fed is not changing its target. Now a broader question, which is interesting to economists and historians, is whether it should have set a higher number when it did latch on to a target, not 2%. That’s quite debatable, and I think I’d be on the side of yes, it should have gone higher. So why do I say both? It’s the same answer to the reason of ‘why is there no debate at the Fed?’ Because it would look like caving, giving in, surrendering — ‘we can’t do it, so we’re going to make our target easier.’ And immediately people would start saying, ‘oh, you went up to 3%, how do I know you won’t go up to 4%?’ Let’s say for the next 35 years, the Fed is not going to think about changing the target.

Q: What would’ve been, in your view, a better target than 2%?

A: I thought 3% would be better than 2%. And the main reason is what we were experiencing before the pandemic with zero interest rates that if it were 3% rather than 2%, the Fed would’ve had more room as the economy cratered to push the economy out of the crater with lower interest rates. If it had started with interest rates a hundred basis points higher than it did, it would have a hundred basis points more easing before it had to resort to the so-called unconventional policies.

Q: Your book “A Monetary and Fiscal History of the United States, 1961–2021” covers a lot of ground. Is it just a lost cause to ever think that fiscal policy could or will ever be used in the fight against inflation? Is it just too politically impossible to even consider anymore?

A: Yes, in a word. I wish it weren’t true, but I think it is true. One of the things I reminded myself in researching and writing this book is the last time fiscal policy was used deliberately by the government to take some steam out of the economy to fight inflation was 1968. That’s a long time. There have been other episodes since ‘68 in which fiscal policy turned contractionary. But that was always motivated by concerns about the deficit, not about concerns about the economy. I was in the Clinton administration, and that was an example. We promulgated and barely got through Congress by the skin of our teeth a contractionary fiscal policy to reduce the deficit. It was not to bring down inflation. Inflation was 3%. Believe me, Bill Clinton was not concerned that the inflation rate was 3%. He was concerned about the budget deficit.

--With assistance from Stacey Wong.

This article was provided by Bloomberg News.