Fed's rate hikes likely to cause a recession, research says

Can the Federal Reserve keep raising interest rates and defeat the nation’s worst bout of inflation in 40 years without causing a recession

Can the Federal Reserve keep raising interest rates and defeat the nation's worst bout of inflation in 40 years without causing a recession?

Not according to a new research paper that concludes that such an “immaculate disinflation” has never happened before. The paper was produced by a group of leading economists, and two Fed officials addressed its conclusions in their own remarks Friday.

When inflation soars, as it has for the past two years, the Fed typically responds by raising interest rates, often aggressively, to try to cool the economy and slow price increases. The Fed's higher rates, in turn, make mortgages, auto loans, credit card borrowing, and business lending more expensive.

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But sometimes inflation pressures still prove persistent and require ever-higher rates to tame. The result — steadily rising borrowing costs — can force companies to cancel new ventures and cut jobs, and consumers to reduce spending. It all adds up to a recipe for recession.

And that, the research paper concludes, is just what has happened in previous periods of high inflation. The researchers reviewed 16 episodes since 1950 when a central bank like the Fed raised the cost of borrowing to fight inflation, in the United States, Canada, Germany and the United Kingdom. In each case, a recession resulted.