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 1. Home
 2. Economy & Politics
 3. Key Words


KEY WORDS




U.S. ECONOMY WILL FALL INTO A RECESSION THIS SUMMER, AS INFLATION EATS INTO
CONSUMER SPENDING, FORMER FED OFFICIAL WARNS

Published: April 4, 2022 at 3:45 p.m. ET
By

GREG ROBB

  comments


FED ‘NOWHERE CLOSE’ TO CONTROLLING INFLATION, SAYS LAWRENCE LINDSEY

FORMER FED GOVERNOR LAWRENCE LINDSEY ALSO WAS DIRECTOR OF THE NATIONAL ECONOMIC
COUNCIL FOR PRESIDENT GEORGE W. BUSH. (PHOTO BY CHIP SOMODEVILLA/GETTY IMAGES)

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Higher inflation will force consumers to limit their spending by so much that
the economy will slump into a recession by the July-September quarter, former
Federal Reserve Governor Lawrence Lindsey said on Monday.

“I do think we’re going to have a recession, probably in the next quarter,”
Lindsey said, in an interview on CNBC.

“Inflation is eating into consumer spending power, they’re going to have to cut
back,” he said.


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The former Fed governor also said the U.S. central bank was “nowhere close” on
being able to control inflation.

Lindsey said he was worried that inflation was poised to move higher — and there
could soon be monthly prints of the CPI above 1%. Consumer inflation hasn’t
risen 1% or more for two straight months since the summer of 1980.

“That’s going to push consumer purchasing power down by about 2 points on top of
the 2.5 points it has already declined since the beginning of 2021. You can’t
have that much of a shock without having a recession,” he said.



Lindsey, who served as a governor from 1991 to 1997, is chief executive of The
Lindsey Group, an economic advisory firm based in Washington D.C. He was famous
for having been turned down for a credit card while he was on the Fed board.

Purchasing power is an estimate of wage gains adjusted for inflation. In the
CNBC interview, Lindsey did not give any details on his calculations.

The Labor Department estimates that earnings adjusted for inflation fell by 2.6%
over the 12 months ending in February.

But Stephen Stanley, chief economist at Amherst Pierpont, said the government’s
estimate “is about as unfavorable a comparison as could be devised.” Alternate
measures show that inflation is taking much less of a bite out of spending, he
said.



“In sum, while inflation is likely to be a drag on the consumer, it is unlikely
to prevent households from continuing to spend at a solid clip this year,”
Stanley wrote in a note to clients.

Many economists think that consumers have savings stored up from the pandemic
that will help them weather the bout of high inflation.

Lindsey said the Fed eventually will have to increase its benchmark interest
rate higher than consumer price inflation — now running at an 8% annual rate —
in order to get prices in check. At the moment, the Fed’s benchmark interest
rate is in a range of 0.25% – 0.5%.

“There has never been significant disinflation since the early 1950s without the
CPI being lower than the fed funds rate. We are nowhere close, nowhere close, to
being able to control inflation with what we have,” he said.


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I SET UP A COMPANY WITH FRIENDS. IT HAS SALES OF $1 MILLION. TWO PARTNERS
HIJACKED CONTROL OF THE BANK ACCOUNTS, AND WANT TO PUSH OTHERS OUT. WHAT CAN WE
DO?

I SHARED EXPENSES 50/50 WITH A FRIEND ON VACATION. SHE WANTS ME TO SPLIT THE
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‘PREPARE FOR AN EPIC FINALE’: JEREMY GRANTHAM WARNS ‘TRAGEDY’ LOOMS AS
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3 REASONS WHY THE FED MIGHT PIVOT TO A LESS HAWKISH STANCE

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READ NEXT


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THE HOUSING RECESSION WILL CONTINUE AND EVENTUALLY FLATTEN HOUSE PRICES, GOLDMAN
SACHS ECONOMIST SAYS

The housing sector is in something of a recession, and an economist at Goldman
Sachs says the downturn will continue -- and eventually slow the still-rapid
pace of house price rises.


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ABOUT THE AUTHOR

Greg Robb


Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on
Twitter @grobb2000.

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