It’s more or less official: the Federal Reserve is engineering a recession.
After first telling the public he could safely bring down inflation without hurting the economy, then telling us there might be some suffering after all, but just a little bit, Fed chair Jerome Powell is now openly acknowledging an economic downturn is on the menu. After he and other Fed officials vowed they’d keep tightening monetary policy until the job was done, come what may, Powell has in two separate sets of public remarks over the past few weeks explicitly said fixing inflation will “require a sustained period of below-trend growth” and “some softening of labor market conditions,” as the Fed’s third consecutive seventy-five-point hike sent markets scrambling.
For those confused, Powell’s remarks were Fed-speak for: a bunch of Americans are going to have to lose their jobs, and a bunch more are going to have a harder time finding one. New Federal Reserve Bank of Boston president Susan Collins recently put it in slightly more comprehensible terms as she gave her sign-off to Powell’s strategy: fixing inflation will “require slower employment growth and a somewhat higher unemployment rate.”
Or as a recent CBS News headline put it: “Buckle up, America: The Fed plans to sharply boost unemployment.” The Federal Reserve itself is forecasting a 4.4 percent unemployment rate next year, meaning 1.2 million more people out of work — and that’s if the Fed’s benevolent technocrats get it right.
Trouble is they might not, something a growing number of voices are cautioning, from investment bank economists advising their clients how to minimize their coming losses to even some figures in the Federal Reserve system itself.
UBS chief US economist Jonathan Pingle, for instance, called Powell’s words a “remarkable” sign that “they’re increasingly accepting of the idea that they may cause a recession.” He cautioned that even as inflation shows signs of improving, “the Fed now is raising rates so quickly that they’re not really allowing time for that improvement to show up,” which means an “increased risk of hard landing.”
Charles Evans, president of the Chicago Federal Reserve, expressed the same reservations about the policy. While taking care to say he was “cautiously optimistic” about avoiding a downturn, he said he was “a little nervous” that the Fed was “not leaving much time to sort of look at each monthly release” and warned that “shocks” and “other difficulties” could make things worse even if the rate hikes were perfectly well calibrated.
Maybe most alarming are the conclusions of BlackRock, the world’s largest investment manager, which offered a scathing opinion on the Fed’s actions as it warned investors to avoid the stock market. The Fed’s “economic forecasts are too optimistic,” strategists at the BlackRock Investment Institute recently wrote, and the central bank isn’t “fully acknowledging how much economic pain it will take in a world shaped by production constraints” to meet its goal of bringing core inflation down to 2 percent. They estimate it would require “a roughly 2 percent hit to economic activity and 3 million more unemployed.”
Most scathing is BlackRock’s view on the Fed’s thinking on the supply constraints that are driving inflation. Noting, as Powell himself admitted earlier this year, that central banks aren’t able to fix these pandemic-driven supply distortions, the BlackRock strategists argue the result is a “brutal trade-off” of triggering a “deep recession” to get price rises under control — a trade-off the Fed doesn’t acknowledge.
“It reconciles this by assuming production constraints will rapidly dissolve, causing inflation to fall quickly,” they write. “But if that’s the outcome, what’s the point of the fastest hiking cycle since former Fed Chair Paul Volcker’s era?”
You’re seeing this sort of talk from all kinds of market players beyond BlackRock. The CEOs of the country’s biggest banks told Congress last week that Powell’s moves would mean “tough times ahead.” Citigroup just raised the odds of a US recession from 50 to 70 percent because of the speed of the Fed’s monetary tightening. Moody’s puts those odds at just under 60 percent, arguing that the Fed’s been clear it’ll “force the economy into recession to wring out the high inflation.” Multiple Bank of America analysts predict the Fed, being “dead-set on ensuring that they get that labor market slowdown,” is “probably going to overdo it,” bringing “pain to households and businesses” through higher interest payments, slower growth, and more unemployment.
Analysts at Fannie Mae, JPMorgan Chase, Charles Schwab, and a variety of other financial services companies have all said the same thing, often pointing to the lag between changes in monetary policy and when its effects show up, particularly when it’s moved as fast as this current cycle of tightening. It was partly on this basis that Wharton Business School professor Jeremy Siegel said that Powell “should offer the American people an apology” for the Fed’s “poor monetary policy.”
What they’re warning about is hardly unprecedented. It’s not just that the kind of monetary tightening Powell is embarking has almost always resulted in a recession. The Fed’s own economists found that under very similar circumstances in 1920, the central bank tried similarly to rein in inflation through rate hikes and others of the limited tools at its disposal, believing it could manage the economy into equilibrium. Instead, conditions rapidly spun out of its control, with the labor market to the Fed’s monetary tightening “at a speed which can outpace policymakers’ abilities to track current economic conditions,” and the country plunged into a “deep recession.”
Meanwhile, this week came with yet more evidence that a not-insignificant part of the inflation story is corporate price gouging, with the Intercept reporting that one CEO recently told a group of Wall Street analysts that he had been “doing my inflation dance praying for inflation,” because it allowed them to get away with raising prices higher than they needed to and skimming the profits, echoing the comments of other executives.
At the same time, researchers at the Federal Reserve Bank of San Francisco recently found that more than half of the overall surge in US house prices and rents may be due to the wider shift to working from home instead of the office. Besides the ongoing supply chain disruptions caused by the pandemic and the war in Ukraine, both of these pieces of news suggest, depressingly, that the Fed is going to nose-dive the economy into a recession and still not solve the problem of inflation — leaving us mired in the dreaded stagflation, where prices are obscenely high and jobs are harder to come by.
The Biden administration can and should put pressure on Powell to cool his jets and stop this disastrous course. If not, then the second a downturn hits, you can be sure all the usual suspects will point the finger at federal spending and measures like Joe Biden’s flawed climate bill and his extremely limited student debt cancellation. But you’ll know it was the unelected bureaucrats at the Federal Reserve, who told us again and again they’d engineer a recession, all while insisting they stay free to act independently of democratic control.