High inflation poses a greater threat than possible recession

Neil Kashkari, Federal Reserve Bank of Minneapolis

Brendan McDermid | Reuters

If you’re debating whether or not the United States is in a recession, you’re asking the wrong question, according to a senior Federal Reserve official.

“Whether we’re technically in a recession or not doesn’t change my analysis,” Minneapolis Federal Reserve Bank President Neil Kashkari told CBS’ “Face the Nation” on Sunday. “I focus on inflation data. I focus on wage data. So far, inflation continues to surprise us on the upside. Wages continue to grow.”

Last month, US inflation jumped to its highest level in four decades, rising 9.1% from a year ago. At the same time, the labor market remained strong: Nonfarm payrolls rose by 372,000 last month, along with a low national unemployment rate of 3.6%.

New Labor Department data Thursday showed signs of a slowing labor market, with initial jobless claims reaching their highest level since mid-November. However, Kashkari said the job market is “very, very strong.”

“Usually, recessions show huge job losses, high unemployment rates, and that’s horrible for American families. We don’t see anything like that,” he said.

The problem, Kashkari said, is that even in a strong labor market, inflation is outpacing wage growth — giving many Americans a job “wage cut” while raising the cost of living across the country. He added that solving this problem by reducing inflation is the supreme goal of the Federal Reserve at the present time.

“Whether we’re technically in a recession or not, it doesn’t change the fact that the Fed has a business of its own, and we’re committed to doing that,” Kashkari said.

The Bureau of Economic Analysis reported Thursday that the country’s gross domestic product contracted for the second consecutive quarter, often a warning sign accompanying an economic recession. For Kashkari, this may actually be a good thing: an economic slowdown can help reduce inflation to the point where it does not outpace wage growth.

“We definitely want to see some slowdown [of economic growth]“We don’t want to see the economy overheating. We wish we could transition to a sustainable economy without pushing the economy into recession,” he said.

Doing so poses a major challenge to the Federal Reserve. Kashkari admitted that economic slowdowns tend to be very difficult to control, “especially if the slowdown is caused by the central bank.”

However, he said the bank will do whatever is necessary to tame inflation.

“We will do everything we can to avoid stagnation, but we are committed to reducing inflation and we will do what we have to do,” Kashkari said. “We are a long way from having an economy back to 2% inflation. And that’s where we need to get to.”

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