The Federal Reserve's effort to shock the economy back to lower inflation is in its early days, making it tough for the U.S. central bank to avoid overdoing it with higher-than-needed interest rates, a top economic adviser in the Obama White House said after a fresh review of Fed policy since World War Two.
The Fed has raised its target policy rate by more than 4 percentage points in the last year, and "we are just now entering the window where the effects might start to be noticed," Christina Romer, an economics professor at the University of California, Berkeley, and chair of the White House's Council of Economic Advisers from 2009 to 2010, told a national gathering of economists late on Saturday.
"Policymakers are going to need to dial back before the problem is completely solved if they want to get inflation down without causing more pain than necessary," she said. in December showed central bankers struggling with the risks, while economists see a high probability that the rate increases will lead to a U.S. recession in the coming year.Romer, outgoing president of the AEA, is an expert on the causes and recovery of the Great Depression of the 1930s and argued as CEA chair for a much larger fiscal response to the 2007-2009 recession than was approved.
Since transcripts are only available through 2016, they relied on minutes alone in more recent years and concluded that the current tightening cycle counts as an 11th monetary policy "shock."Those events contrast with other Fed rate decisions meant to stay in synch with the business cycle or respond to outside economic events, such as the collapse of the housing market and the onset of recession in 2007.
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