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