Forget about a soft landing. Federal Reserve Chair Jerome Powell is now aiming for something much more painful for the economy to put an end to elevated inflation. The trouble is, even that may not be enough.
It’s known to economists by the paradoxical name of a “growth recession.” Unlike a soft landing, it’s a protracted period of meager growth and rising unemployment. But it stops short of an outright contraction of the economy.
Powell “buried the concept of a soft landing” with his Aug. 26 speech in Jackson Hole, Wyoming, said Diane Swonk, chief economist at KPMG LLP. Now, “the Fed’s goal is to grind inflation down by slowing growth below its potential,” which officials peg at 1.8%.
“It’s a bit like dripping water torture,” added Swonk, who attended the Fed’s annual Jackson Hole symposium last week. “It is a torturous process but less torturous and less painful than an abrupt recession.”
The shift in Powell’s message got the attention of Wall Street. Stock prices have swooned since the Fed chair vowed to do what it takes to rid the economy of too-high inflation.
Politicians in Washington took note too. Massachusetts Senator and former Democratic Party presidential hopeful Elizabeth Warren voiced concern that the Fed could tip the economy into a recession, while Senate Republican Party leader Mitch McConnell said a downturn was likely as the central bank raises rates to combat inflation.
In the archetypal soft landing in 1994-95, the Fed slowed the economy briefly and contained inflation through a doubling of interest rates. But unemployment never really rose. It just stopped falling for a while.
The late New York University economist Solomon Fabricant coined the term “growth recession” in research published in 1972. While such a scenario may not be as costly as an actual contraction, it poses dangers for the economy nonetheless, he suggested at the time.
A tiger contained “is not the same as a tiger loose in the streets, but neither is it a paper tiger,” he wrote.
Powell has seemingly concluded that it will take a tiger -- and not just a soft landing -- to attack America’s pernicious inflation. In his Jackson Hole speech, he said the labor market was “clearly out of balance,” with the demand for workers substantially exceeding the supply. That’s led to rapid wage rises that are incompatible with the Fed’s 2% inflation target.
“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “Moreover, there will very likely be some softening of labor market conditions” -- widely seen as a euphemism for higher unemployment.
Joblessness probably held steady in August at a five-decade low of 3.5% as payroll growth slowed to 300,000 from 528,000 in July, according to the median forecast of economists surveyed by Bloomberg. The monthly data are scheduled to be released by the Labor Department on Friday.