With inflation raging and the Fed continuing to raise rates in an attempt to lower it, economists expect the U.S. may need to dip into recession to bring prices back to stable levels.

“The U.S. economy is experiencing a rapid and substantial slowdown, which will be reflected relatively quickly in a significant change in tone across a wide range of economic indicators,” Carl Riccadonna and a team of economists at BNP Paribas wrote in a research note this week. after the Fed announced a rate hike on Wednesday.

As Ricodonna noted, Fed Chairman Jay Powell made it clear that the Fed was determined to do “enough to restore price stability.” But it is difficult for the central bank to do this: Fed governors have only a few toolsand they don’t work perfectly.

A pair of new academic papers from economists affiliated with the National Bureau of Economic Research examine both the Fed’s dilemma and the work of the economists who follow it. In one study, “Ideas about monetary policy,” researchers Michael Bauer of the University of Hamburg, Carolyn Pflueger of the University of Chicago, and Ada Sander of Harvard Business School examine how professional economic forecasters predict Fed actions.

These forecasters — economists and market strategists who work at institutions like Bank of America, for example — get paid to figure out what the Fed is going to do before the central bank does. This used to be a much more difficult task before the era of transparency, when Fed chiefs rarely explained their thinking.

But even today, when Chairman Jay Powell holds press conferences to discuss how central bankers view the economic data, it’s hard to know exactly what they’re planning and what the impact will be on the economy. This is important because “what matters for the success of monetary policy is not only the actual monetary policy framework used by policymakers, but also the public’s understanding of that framework,” the researchers write.

The researchers studied how forecasters’ predictions tracked what actually happened later.

“What we think is happening is that even these very sophisticated professional forecasters don’t know exactly what monetary policy is,” said Pflueger, an associate professor at the University of Chicago’s Harris School of Public Policy. “People seem to learn from monetary actions.”

When the Fed raises rates amid a strong economy, analysts know the central bank is paying attention to economic conditions and will respond accordingly, she said. It takes forecasters about six months to figure out what the Fed is doing, but at that point they can infer the Fed’s intentions to some degree, the researchers found.

For bankers, the important takeaway from the paper is to look sharp, Pflueger said: “When you see a change in the structure of monetary policy, it can change faster than you think.”

The question John Cochrane, an economist and senior fellow at the Stanford Hoover Institution, asks in his working paper is how effective such a framework is: “Can the Fed contain inflation without sharply raising interest rates?” The answer, he said, is that “we really don’t know.”

According to him, it is “possible, but difficult” for the Fed to control inflation. That’s because pandemic relief spending has run out for the past two years, so it’s possible that inflation will disappear once the government stops spending so much money. But it’s also possible that conventional economic wisdom is correct and that the Fed will have to raise rates to be higher than the current rate of inflation before prices fall, he said.

Cochrane had a darker view of the implications of his paper, “Interest rate expectations and neutrality,” for banks. “I think the Fed will steadily raise rates until inflation comes down substantially,” he said. “Inflation has a lot of momentum; it took two years to really get going and will take some time to cut back. So I think rates are going to be a lot higher than most people (and financial markets) are predicting.”

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