by Calculated Risk on 8/11/2006 12:24:00 AM

From the NY Times: Economy Often Defies Soft Landing, here are a few predictions:

Analysts and other experts say that if Mr. Bernanke is serious about his goals for controlling inflation, at least two million more workers may have to lose their jobs over the next two years.

"The economic slowdown has to be much more substantial than anybody in the Federal Reserve or on Wall Street is expecting," said Robert J. Gordon, a professor of economics at Northwestern University, who has analyzed the trade-off between inflation and unemployment for the last several decades.
...
Mr. Gordon said the last few decades had shown a grim but consistent trade-off: to reduce inflation by one percentage point, the unemployment rate has to rise by about two percentage points for a full year.

To reduce inflation to the upper limits of what Mr. Bernanke and other Fed officials consider acceptable, more than three million jobs would be lost, a bigger drop than in the recession of 2001.

And that is Mr. Gordon’s relatively upbeat hypothesis, which assumes no other shocks to the economy — no additional increases in energy prices, no collapse in the dollar’s value, no collapse in housing.

"I think the Fed is facing an absolutely classic case of stagflation," Mr. Gordon said, "a situation in which they cannot win."

Here are some numbers from the late '80s Fed hikes ('91 recession):

YoY CPI decreased from 6.3% to 3.0%
YoY Core PCE decreased from 4.5% to 2.2%
The economy lost 1.6 net million jobs.
And the unemployment rate rose from 5.2% to 7.8%

On the job losses, the economy needs to add around 150K jobs per month to keep the unemployment rate steady. So in addition to losing 1.6 million jobs, the economy didn't create the needed 1.8 million jobs per year. That is why the unemployment rate rose from 5.2% to 7.8%

Currently inflation is not as high as in 1990. Last quarter core PCE was 2.9%, still below the 4.5% YoY peak in 1990. So maybe the unemployment rate will not rise as far as in 1992. That is what Allen Sinai believes:

Others predict that inflation will indeed subside, but only because the economy will weaken much more than the Fed is expecting.

The chief forecaster at Decision Economics, Allen Sinai, said unemployment would have to rise to at least 5.5 percent, from 4.8 percent today, putting a million more people out of work, before inflation begins to decline.

That still sounds pretty grim.