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For the Fed, fighting inflation is imperative, but slamming the economy would be premature

With inflation stubbornly high and the war in Ukraine adding pressures, some are calling for a “Volcker shock” to insure against structurally high inflation. The Federal Reserve has no hope of delivering a soft landing, the argument goes, and should choke the economy into recession with shock treatment of very high interest rates, thereby wringing inflation from the system—much as then-chair Paul Volcker began to do with a surprise announcement one Saturday in October 1979.

This research was published on April 8th, 2022 in Fortune

With inflation stubbornly high and the war in Ukraine adding pressures, some are calling for a “Volcker shock” to insure against structurally high inflation. The Federal Reserve has no hope of delivering a soft landing, the argument goes, and should choke the economy into recession with shock treatment of very high interest rates, thereby wringing inflation from the system—much as then-chair Paul Volcker began to do with a surprise announcement one Saturday in October 1979.

Yet whether to take out such macroeconomic insurance—a recession is the price of eliminating the risk of inflation shifting structurally much higher—is a difficult call to make. Far from obvious, this requires calibration of that risk and of the cost of reducing it. It is also a question of when the right time would be to insure against such a structural break.