Fiscal and monetary policies must work together for the U.S. to win the ongoing battle against inflation, says Kevin Hassett. He’s the former Chairman of the Council of Economic Advisors (CEA).
Hassett’s remarks on CNBC’s ‘Squawk Box’
This morning on CNBC’s “Squawk Box”, Hassett called on the U.S. Congress to play its role in adjusting the fiscal policy and helping the Fed in its efforts to lower prices. He said:
If you want to fix inflation, you have two choices. Congress passes laws to reduce government spending and come up with ways to stimulate labour force participation and capital spending, increasing supply. [Or], have the Federal Reserve go alone.
The latter, he warned, is known to be effective in lowering demand, but runs a risk of increasing the cost of capital, thereby hitting supply as well.
Hassett says a recession seems likely
The U.S. economy shrank at an annualised pace of 1.60% in the first quarter of 2022 and it will most definitely plunge into a recession if the central bank is left to fight inflation alone, Hassett added.
When you have inflation this high, history of it is that central bank policy gives you a very deep recession before inflation gets under control. If you [want to] not do that, then you need to get fiscal policy to play along too.
Earlier in June, the central bank resorted to its biggest rate hike (75 bps) after the CPI hit a new forty-year high of 8.60%. Consequently, the benchmark S&P 500 index plummeted into the bear market territory.
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