That’s the question two of the world’s top economists debated in a Goldman Sachs research note on Monday.
Jan Hatzius, Goldman’s chief economist, and Olivier Blanchard, who, besides serving as the International Monetary Fund’s chief economist from 2008 to 2015, was also an early voice alongside Larry Summers in predicting high inflation this year and last, stand on opposing sides of what has become a heated argument in economics.
Blanchard makes the case that the Federal Reserve will be forced to raise interest rates until the unemployment rate rises to 6% if it wants to control inflation, which was sitting at 8.3% in August. A move that Goldman’s strategists say “would spark a fairly severe recession.”
Hatzius, on the other hand, makes the case that there is no “structural mismatch” between job openings—which surged during the pandemic—and the unemployment rate, which means the overheated labor market can be cooled through more minor rate hikes that will mainly shrink job openings and cause fewer real job losses.
In other words, he believes the U.S. economy can still find a “soft landing,” and avoid an outright recession.
To be clear, Blanchard and Hatzius are voicing positions that many other leading economists have argued.
Hawks like former Treasury Secretary Larry Summers, and president of Queens’ College, Cambridge, Mohamed El-Erian, stand with Blanchard, fearing that inflation might become “entrenched” as it did in the 70s if the Fed doesn’t hike rates dramatically to create a significant rise in unemployment.
While more dovish economists, like Nobel laureate and New York Times columnist Paul Krugman, Howard University Professor William Spriggs, and former Fed section chief Claudia Sahm stand with Hatizus, arguing that inflation has already peaked, and a significant rise in unemployment isn’t necessary to reduce consumer prices.
They note that most of the inflationary pressures in the…