US | The dilemma that the Fed could face

Summary

Even though there is a risk of a recession induced by the Fed given the fast increment in the federal funds rate that could raise it to 4.0% by the end of the first quarter of 2023, we shall recognize that the highest risk for the US and the global economy would be the Fed’s failure to reestablish price stability.

Key points

• Key points:
• In-house estimations indicate that the Fed was left very behind the curve in December 2021, but it will be able to get ahead of the curve as of March 2023.
• Using the Gagnon-Collins’ non-linear model to estimate the Phillips curve and keeping the Fed’s assumptions on the unemployment rate, the non-accelerating inflation rate of unemployment (NAIRU) needs to drop to 4.2% as of this year to make it possible for core inflation to reach 2.0% by the end of 2024.
• Nevertheless, if the pandemic left scars on the labor market, the NAIRU could just drop to 5.0% and core inflation would be 3.0% by the end of 2024.
• The convergence towards 2.0% with this NAIRU would require an increase of the unemployment rate from 3.9% to 4.7% and 4.1% to 5.0% for 2023 and 2024, respectively.

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