America Is on the Verge of a ‘Deeper Recession’ as Inflation Pushes Fed to Hit Brakes Harder: Economist

Federal Reserve Board Chairman Jerome Powell speaks during a news conference in Washington, on July 27, 2022. Elizabeth Frantz/Reuters

Clouds are darkening on America’s economic horizon as a large number of sidelined workers force businesses to raise wages to attract talent, adding to inflationary pressures and pushing the Fed to keep tightening aggressively, according to an economist and professor at King’s College, who warned that the country is perched on “the brink of a deeper recession.”

Brian Brenberg, an executive vice president and associate professor of Business at King’s College, told Fox News in an interview that aired Wednesday that a troubling number of Americans have dropped out of the workforce, forcing businesses to compete for labor by hiking wages, pushing inflation higher.

“If you look at the labor participation rate numbers, it’s lower today than it was before the pandemic started,” he said.

Under President Donald Trump, the labor force participation rate grew from 62.9 percent in February 2017, his first full month in office, to 63.4 percent in February 2020.

The metric plunged in April 2020 to 60.2 percent as the country locked down during the pandemic. The most recent data for July 2022 shows the labor force participation rate stood at 62.1 percent.

This “means we’re about three million jobs behind where we should be,” Brenberg said of the current labor force participation rate. “Businesses feel that.”

The most recent data on job openings in the United States show that the number of vacancies rose by nearly 200,000 from June to July to hit 11.2 million. That represents roughly two openings for every unemployed person.

Brenberg said that the shortage of available labor means businesses are having to boost wages “to try to get workers in the doors but that keeps pushing inflation higher, that makes the Federal Reserve’s job harder, they are going to raise rates more.”

“That’s where that recession risk comes. We’re sitting on the brink of a deeper recession because of this issue,” he added.

‘More Work to Do’

The Fed found itself behind the curve on the inflation fight after initially downplaying jumping prices as “transitory.” So the central bank embarked on a swift tightening cycle, delivering a series of interest-rate hikes that have pushed its policy rate into the range of 2.25–2.5 percent.

But inflation has remained stubbornly high. The Fed’s preferred inflation gauge, the so-called core PCE inflation measure that strips out food and energy, was running at 4.6 percent in July, more than double the central bank’s 2 percent target.

In the face of persistently high inflation, Fed officials have said there’s more work to be done and have vowed to keep hiking rates until they get inflation down closer to target.

Loretta Mester, president of the Federal Reserve Bank of Cleveland, said Wednesday that the Fed is determined to keep raising rates and keep them high as long as it takes—even if it means a sharper slowdown and higher unemployment.

Some economists have argued that the Fed’s policy posture might push the country into a deep recession.

‘Hard Landing’

Economist Nouriel Roubini recently argued that there are now only two paths for America’s economy—either uncontrolled inflation or a long and harsh recession.

“In the United States, whenever you had inflation above 5 percent and unemployment below 5 percent, the Fed tightening has led to a hard landing,” Roubini told Bloomberg in an Aug. 15 interview.

Unemployment in the United States is at 3.5 percent, and the latest Consumer Price Index (CPI) inflation gauge came in at 8.5 percent year over year.

“My baseline is a hard landing,” Roubini said, referring to an economic slowdown that’s sharp.

“Delusional” is how Roubini described market expectations that the Fed would pivot away from monetary tightening and start lowering interest rates, given that inflation remains persistently high.

Roubini also said he continues to believe that it’s “delusional” for analysts to expect a short and shallow recession, arguing instead that it will be long and severe.

Not Necessarily ‘Calamitous’

A number of Fed officials have acknowledged the risk of recession as the central bank tightens monetary settings.

Richmond Fed President Thomas Barkin said on Aug. 30 that the Fed is committed to hiking rates to tame inflation but he doesn’t think this will necessarily result in a severe downturn.

“A recession is obviously a risk,” Barkin said during an event at the Huntington Regional Chamber of Commerce in West Virginia.

“It doesn’t have to be like a 2008 recession. It doesn’t need to be calamitous,” he said.

Barkin said that the forces of supply and demand are “out of balance today” and that bringing down demand through tighter monetary policy and restoring that balance would have benefits.

“Returning to normal might actually mean products on shelves, cars on lots, and restaurants fully staffed,” he said.