Economist: Fed playing a 'dangerous game' with economy

(NewsNation) — Inflation is at a 40-year high and Americans are feeling it everywhere from the grocery store to the gas pump and the housing market as part of an economy that at times seems to be teetering between stability and calamity.

The Federal Reserve is tasked with the challenge of walking the fine line of raising interest rates to curb inflation but not raising them to a point that sends the economy into a tailspin and possible recession.

The job market is still strong, adding 390,000 jobs in May, signaling the economy may be stronger than the fears of some would indicate. But there is still a very delicate course at hand for the federal government to navigate in keeping the economy afloat.

Sultan Meghji, executive director of the Global Financial Markets Center at Duke University, said Chair Jerome Powell and the Federal Reserve, which raised interest rates and will likely continue to raise them, is playing a “dangerous game” in its attempts to correct inflation.

“They’ve got to slow the economy down and kind of cool things off a little bit to get inflation under control,” Meghji said. “But in doing so, there is a real opportunity they are going to overcorrect and slow the economy down too much.”

Many Americans, businesses in particular, have benefited over the last few years from the Fed’s active role in pumping more money into the economy in an attempt to stimulate an economy rocked by the COVID-19 pandemic. However, the economy has grown too much and now Fed leadership feel they must pump the brakes and raise interest rates.

Meghji said there is a fear that if interest rates get above 3.5% — they currently sit at a range of 0.75% to 1% — that a recession could result.

FILE – This Tuesday, May 4, 2021, file photo shows the Federal Reserve building in Washington. The Federal Reserve reports that the economy faced a number of headwinds at the start of October, ranging from supply chain disruptions and labor shortages to uncertainty about the delta variant of COVID. (AP Photo/Patrick Semansky, File)

There are three “waves” going on in the economy right now that must be managed, according the Meghji: inflation, higher home and auto loan rates and quantitative tightening.

“Balancing all three of those things at the same time has never really been done before, certainly not in our lifetime,” Meghji said.

There is no guarantee a recession will happen. The job market is strong, layoffs are low and American spending is still high. But the slowdown of the economy is something economists are keeping a close eye on, Meghji said.

“As we slow down the feed of new money into the system, that’s going to cause a disconnect and we’re starting to see these friction points,” he said.

What the current economy is showing us — high prices, high interest rates and a robust job market — is something that could stick around for another 12 to 18 months, Meghji said.

“I think we’re looking at probably two years of some variability and potentially even longer if the Fed doesn’t act a little faster,” Meghji said.