Buckle up for A Crashing Economy And More Inflation
The comments below are an edited and abridged synopsis of an article by Michael Maharrey
Fed Chair Jay Powell hinted that inflation might be a problem last August. But here we are in May 2022, and the Fed still hasn’t done anything substantive to address the inflation problem.
Now it may be too late. It’s probably time to buckle up for more inflation, and perhaps a crashing economy.
In March, the Fed raised interest rates a paltry 25 basis points. At the May meeting, the FOMC followed up with a more aggressive 1/2% rate hike but took a 75 basis point rate hike off the table.
Meanwhile, the Fed didn’t start tapering until January. In mid-April, the balance sheet was still expanding, hitting an all-time high of $8.97 trillion.
At the May FOMC meeting, the Fed unveiled its balance sheet reduction scheme. If the Fed shrinks its balance sheet at the proposed rate, it will be back to pre-pandemic levels in about eight years.
The Fed has targeted a 2.5% interest rate by year end. With GDP already going negative in Q1, it’s questionable if the Fed can get there without completely tanking the economy. There are already signs that it has pricked the housing bubble.
The Fed needs to push rates much higher than 3%. Rates have not risen above 2.5% since the 2008 financial crisis. The last time they were above 5% was August 2007 as the housing bubble was deflating and setting up the 2008 crash.
Maharrey quotes from Mises Institute senior editor Ryan McMaken: “The reality is that the economy is contracting and personal finances are worsening. Inflation is high and wages are not keeping up. Under these conditions, the Fed will desperately want to embrace more easing so as to stave off a full-blown recession. An example of the Fed tightening just as the economy is weakening? That’s practically a unicorn.”
“That means it’s time to buckle up for more inflation. And, ultimately, we may get a recession anyway since it may be that all that is necessary to send the economy over the cliff is just another rate hike or two of 0.25 or 0.50%.”