Possible for US, EU ‘to avoid recession’

The United States and the European Union can avoid recession and achieve a soft landing by bringing inflation down to an acceptable level, a U.S. central bank official said on Aug. 2.

"A soft landing is feasible in the U.S. and the EA [euro area]," St Louis Federal Reserve President James Bullard during a speech at New York university.

But getting there requires that the "shift" in monetary policy, as central banks aggressively hike interest rates to slow runaway inflation, is "executed well."

A key factor will be managing inflation expectations, he added.

If markets and consumers expect prices to continue to rise then they will act accordingly, with stores raising prices, people rushing to buy goods before prices go up, and employees demanding higher wages, among other things.
"Current inflation in the U.S. and the euro area is near 1970s levels," Bullard said.

The fight against inflation then was "costly" to the U.S. economy, with multiple periods of recession, he said, attributing that to the Fed's lack of "credibility."

"Few believed that the Fed was serious about reducing inflation after an entire decade of allowing inflation to build."

As a result, then-Fed Chair Paul Volcker had to "earn credibility" through aggressive fiscal policy.

But "the Fed and the ECB [European Central Bank] have considerable credibility compared with their 1970s counterparts," Bullard said.

He acknowledged that inflation had come in "hotter" than expected during the second quarter of 2022. As a result, the Fed will have to hike interest rates "a little bit higher" than Buller had initially projected.

The Fed's key rates, which set the tone for commercial banks in the United States, are currently between 2.25...