Ex-Obama economist warns stagflation threat level is ‘highest in a long time’

The danger of the US economy returning to a 1970s-style stagflation scenario is the greatest in decades, according to former President Barack Obama’s top economic adviser.

Jason Furman, a Harvard University professor who previously served as chairman of the Council of Economic Advisers, warned that an aggressive Federal Reserve, rising interest rates and persistently high inflation have raised the possibility of a period of stagnant economic growth and high consumer prices.

“It’s a real risk,” Furman said during an interview with FOX Business. “It’s the biggest risk of stagflation we’ve had in a long time. But it’s not a guarantee that the economy will go into recession. Consumers still have a lot of money. They’re still spending. So there’s still some hope for the US economy. “

Stagflation is the combination of slowing economic growth and high inflation, characterized by rising consumer prices and high unemployment. The phenomenon devastated the US economy in the 1970s and early 1980s, as oil prices soared, rising unemployment and easy monetary policy pushed the consumer price index to 14.8% in 1980, forcing policymakers to Fed policies to raise interest rates to nearly 20% that year. .


Jason Furman speaks at the National Association of Business Economics economic policy conference in Washington, D.C., February 25, 2020. (Sarah Silbiger/Bloomberg via/Getty Images)

Inflation accelerated again in May, the government said earlier this month, with the Consumer Price Index, up 8.6%, far above what economists had expected. It marks the fastest pace of inflation since December 1981, underscoring how strong inflationary pressures in the economy still are.

Sizzling inflation has created Financial pressures for most US households, who are forced to pay more for everyday necessities such as food, gas and rent. The burden is disproportionately borne by low-income Americans, whose already strained wages are heavily impacted by price fluctuations.

The stock market has also suffered amid rising inflation and rising interest rates, with the S&P 500 down 20% this year.

As a result, the Federal Reserve is moving at the fastest pace in decades to tame consumer demand and bring inflation closer to its 2% target. Last week, policymakers voted to raise interest rates by 75 basis points for the first time since 1994. The move puts the key federal funds benchmark rate between 1.50% and 1.75%, the highest since the beginning of the pandemic, two years ago.

But the Fed’s policies to curb consumer demand and rein in inflation are expected to slow the economy, with a growing number of Wall Street firms predict a recession in the next two years. Goldman Sachs, Bank of America and Deutsche Bank have increased the odds of a recession in 2022 or 2023, and Fed Chairman Jerome Powell has admitted there is a real possibility of a recession.

“It’s certainly a possibility,” Powell told lawmakers on Wednesday. “We’re not trying to provoke and we don’t think we need to provoke a recession, but we think it’s absolutely essential to restore price stability, really for the benefit of the labor market as much as anything else.”


Federal Reserve

A man walks past the US Federal Reserve building in Washington, April 29, 2020. (Xinhua/Liu Jie via / Getty Images)

Rising interest rates tend to create higher rates on consumer and business loans, which slows the economy by forcing employers to reduce spending. Mortgage rates are already approaching 6%, the highest since 2008, while some credit card issuers have raised their rates to 20%.

Furman said he expects central bankers to end the year with interest rates close to 4% as they race to keep up with inflation. But consumers shouldn’t expect prices to drop right away, he said.

“It will take a while for inflation to come down,” he said. “I think inflation is going to be high all year, and maybe some things will start to go down. Maybe car prices will go down. At some point, gas prices are going to go down. We’ve had oil prices starting to go down. But if you are asking about average prices as a whole, this could take some time.”

Rampant inflation has become a major political responsibility for President Biden ahead of November’s midterm elections, during which Democrats are expected to lose their already tiny majorities. Polls show that Americans see inflation as the biggest problem facing the country. And many families blame Biden for the price spikes.

Federal Reserve Jerome Powell

Federal Reserve Chair Jerome Powell addresses the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, Wednesday, June 22, 2022. (Manuel Balce Ceneta / AP Writing)

In response, the president introduced the possibility of temporarily suspending the gas tax of 18.4 cents per gallon, a move that would require congressional action. The aim is to help consumers cope with higher prices at the pump amid a record increase in fuel costs, but Furman criticized the proposal as a “trick” that will do little to line families’ pockets and instead will provide a major windfall for oil companies.


“To contain inflation, most of that is the job of the Federal Reserve,” said Furman. He suggested that the White House could explore smaller strategies such as reducing the federal deficit, raising tariffs, increasing efficiency in the transportation sector or making it easier to obtain a permit to drive a truck to alleviate supply chain disruptions.

“Lots of little policies you can follow,” he said. “But the big tools are all in the hands of the Federal Reserve.”

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