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How to avoid a recession

Summary:
This comment in the WSJ caught my eye: Fed officials will have to decide whether or when to raise interest rates to restrain inflation. If they move too little or too late, they risk letting inflation get worse for longer. If they move too much or too soon, they risk causing an economic downturn. Actually, the bigger risk is that moving too late will cause a recession. Right now, the labor market is quite strong and the economy has a lot of upward momentum. Inflation expectations remain modest. Modestly slower NGDP growth will not raise the unemployment rate. The economy has a lot of upward momentum. Inflation expectations remain modest. Thus it is a good time to slow inflation. Recessions tend to occur later in a cycle, when growth has slowed and inflation

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This comment in the WSJ caught my eye:

Fed officials will have to decide whether or when to raise interest rates to restrain inflation. If they move too little or too late, they risk letting inflation get worse for longer. If they move too much or too soon, they risk causing an economic downturn.

Actually, the bigger risk is that moving too late will cause a recession. Right now, the labor market is quite strong and the economy has a lot of upward momentum. Inflation expectations remain modest. Modestly slower NGDP growth will not raise the unemployment rate. The economy has a lot of upward momentum. Inflation expectations remain modest. Thus it is a good time to slow inflation.

Recessions tend to occur later in a cycle, when growth has slowed and inflation expectations have risen to unacceptably high levels. The biggest risk is not a recession in 2022, it’s a recession in 2024 or 2025.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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