At a time when inflation is once again at a 40-year high, Federal Reserve Chairman Powell is facing an increasingly serious consideration: he may have to push the economy into recession to regain control of inflation.

Data released by the US Bureau of Labor Statistics on Friday showed that US CPI rose 8.6 per cent in May from a year earlier, accelerating from 8.3 per cent last month to the highest level since December 1981 and higher than market expectations of 8.3 per cent, while CPI rose 1 per cent month-on-month in May, up from 0.7 per cent expected by the market and 0.3 per cent last month, Zhitong Financial APP learned. In addition, core CPI, excluding food and energy, grew 6.0 per cent year-on-year and 0.6 per cent month-on-month, both higher than expected.

The risk of recession in the United States is rising

Rampant inflation has put Federal Reserve Chairman Powell at the center of the storm. For most of last year, Powell looked a bit like Arthur Burns, the former Fed chairman who showed tolerance for inflation, but now Powell is increasingly playing a role similar to Paul Volcker's "inflation killer".

So far, Powell has not commented on more aggressive monetary policy or the possibility of a severe recession. Forty years ago, Volcker beat inflation after aggressive monetary tightening, but at the cost of two recessions. Powell recently admitted that controlling inflation may take some pain and that unemployment may even rise as a result, but he still avoids talking about recessions.

This may be understandable, especially in the run-up to the mid-term elections in November. Alan Blinder, a former vice chairman of the US Federal Reserve Board (Federal Reserve), said: "Powell does not want to say the word 'recession' in a positive way, such as'we need a recession'. But he will use a lot of euphemism to replace it. "

A growing number of economists, including the Alan Blinder, say it may take economic contraction and rising unemployment to bring inflation down to a more bearable level, let alone back to the Fed's 2 per cent target.

A survey of economists shows that the likelihood of a recession is expected to be 1/4 this year and 3/4 next year."A recession in 2022 is unlikely, but a recession in 2023 will be difficult to avoid," they said. "

"I am more pessimistic about the opportunity to stabilize inflation at an acceptable level without a recession," said Bruce Kasman, chief economist of JPMorgan Chase & Co. He believes that a long period of high inflation and tight labor market will lead to higher wage requirements and higher corporate costs, which is a dynamic trend.

The highest level of inflation in 40 years caused Treasury yields to soar on Friday, while US stocks plummeted. Investors are worried that the Fed will tighten monetary policy, thus raising its bet on raising interest rates by 50 basis points at its meetings in July and September. Some economists believe that raising interest rates by 75 basis points is already under discussion.

May the Fed's inflation target rise to 3%?

The path and end point of interest rates in the coming months will depend in part on the speed and extent that policymakers want inflation to cool and how much pain they are willing to put on the economy to achieve that goal.

Bank of America Corporation's head of global economic research, Ethan Harris, saidThe Fed may be willing to compromise, accept stabilizing inflation at 3% and consider gradually solving the problem of exceeding its target over time, which will enable it to avoid pushing the US economy into recession。

Olivier Blanchard, a former chief economist of the International Monetary Fund (IMF) who is now a senior fellow at the Peterson Institute for International Economics, bluntly said the Fed "screwed up" and caused inflation to spiral out of control. He said that when inflation fell to 3 per cent, the Fed should stop tightening monetary policy and make it a new inflation target, rather than risk a recession to reduce it to 2 per cent.

However, the longer inflation stays high, the more likely it is to be entrenched in the economy. That's what happened when Burns was chairman of the Federal Reserve in the 1970s, and that's the main reason why Volcker later had to put the economy to such a big test to reduce inflation.

Alan Blinder said it was also dangerous to take too aggressive action to deal with persistent inflation, which could plunge the economy into a very deep recession and cause unemployment to soar. He said the Fed must balance the risk of controlling inflation and recession.

However, Peter Hooper, an economist at Deutsche Bank, believes that if the Fed abandons its 2 per cent inflation target, it would be a "Burns-style" mistake that Mr Powell does not want to make. At least for now, he says, Powell has what Burns does not have: the political support needed to act against inflation.