[Founding Interview] Professor Frankel of Harvard University "US Inflation Nears Peak... Possibility of Stagflation"

'International Finance Expert' Jeffrey Frankel, Professor at Harvard Kennedy School

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[Asia Economy New York=Special Correspondent Seulgina Cho] "The possibility of a recession occurring within this year due to the U.S. Federal Reserve's (Fed) interest rate hikes is low. However, the situation could change in 1 to 2 years."

Jeffrey Frankel, a world-renowned scholar in international finance and fiscal and monetary policy at Harvard University's Kennedy School, gave an inaugural interview to Asia Economy on the 13th (local time), diagnosing that concerns about stagflation?where growth slows globally while inflation soars?have intensified. He explained, "Just 1 to 2 years ago, stagflation seemed like a distant memory from the 1970s. Now, due to various global supply shocks, there is a possibility of stagflation."

Professor Frankel assessed that U.S. inflation, at its highest level in about 41 years, has recently "approached its peak." He added, "Inflation will ease over the coming years," but predicted that "this will happen only gradually." This means that high inflation is likely to persist for some time. The U.S. Consumer Price Index (CPI) for May, released last week, rose by a staggering 8.6% compared to a year ago, marking the largest increase since December 1981.

Regarding the recent heated debate over a U.S. recession, he hinted at the possibility of a downturn within 1 to 2 years. Frankel, who was one of the eight members of the National Bureau of Economic Research (NBER) Business Cycle Dating Committee that officially declares U.S. recessions, stated, "The U.S. is not currently in a recession," but acknowledged, "It is true that due to interest rates and global shocks, a downturn could occur within the next two years."

Furthermore, he identified the biggest current risks to the global economy as the potential recessions in the European Union (EU), China, and the U.S., along with emerging market debt crises caused by global interest rate hikes and a strong dollar.

Below is a Q&A with Professor Frankel.

- Inflation is worsening. When will it peak?

▲ Clearly, last year the Fed was wrong to say that high inflation would be temporary. I believe U.S. inflation is now close to its 'peak.' Inflation will ease over the next few years, but only 'gradually.'

- Do you think the global economy is facing a stagflation crisis of low growth and high inflation?

▲ There is a possibility of stagflation. Just 1 to 2 years ago, stagflation seemed like a distant memory from the 1970s. But now, due to various global supply shocks, stagflation is possible.

- Will the Fed become more hawkish to control inflation?

▲ The Fed has clearly stated it will continue raising interest rates. The U.S. policy rate is still well below neutral levels and will remain so for the rest of the year. The Fed's rate hikes make a recession within this year unlikely, but the situation could change in 1 to 2 years.

- Recently, there has been active debate about a U.S. recession. What is your view?

▲ The U.S. is currently at a business cycle peak, and I do not want to rule out the possibility of a downturn in the future. However, it is difficult to say the U.S. is already in a recession. People are dissatisfied with inflation in the 8% range, but inflation is not a recession. A recession is defined by a significant decline in economic activity. Economic activity has not fallen. Domestic demand remains strong, and expansion is likely to continue into the second quarter.

It is true that due to interest rates and international shocks, there is a possibility of a downturn in the U.S. economy within the next two years. There are serious international risks. The EU will be negatively affected by reducing imports of Russian oil and gas, and China's economy will be impacted by lockdowns due to its zero-COVID policy. These could have ripple effects.

- When do you expect global supply chain disruptions to improve?

▲ Supply chain disruptions such as shipping delays are expected to improve in 2023 compared to now. The rise in oil and commodity prices will also stop and may even reverse. However, this does not mean that the economic impacts of China's zero-COVID policy, the EU's attempts to reduce Russian energy imports, and global interest rate hikes to combat inflation will improve. In fact, these impacts could worsen.

- Then, what is the biggest risk to the global economy at this point?

▲ It is difficult to single out one biggest risk to the global economy. Risks include an EU recession due to rising oil and prices, a Chinese recession due to lockdowns, a U.S. recession due to a stock market crash, or emerging market debt crises caused by global interest rate hikes and a strong dollar.

- How might these global economic conditions affect the U.S. midterm elections this November?

▲ Most voters tend to hold their own country's president responsible for the economy, even when it is influenced by global conditions beyond the leader's control. If global inflation worsens or global growth slows, this will be reflected in U.S. inflation or recession, likely reducing votes for the Democratic Party and President Joe Biden.

- What advice would you give to the newly inaugurated South Korean Yoon Suk-yeol administration?

▲ I have two pieces of advice. Domestically, enforce the rule of law by taking a tough stance against corruption. Internationally, fully participate in multilateral sanctions against Russia to help enforce international law.

This content was produced with the assistance of AI translation services.