Pay attention, folks. You don’t want to be 100% invested in stocks at this moment. Raise some cash just in case.
The stakes are as high as they’ve ever been for the U.S. central bank, which was in its infancy during the Spanish Flu pandemic of 1918, and for the economy and financial markets. For every professional prognosticator who is sure a recession is inevitable, there’s another one predicting that the Fed can combat inflation without reversing economic growth. The disagreement over the inevitability of a recession reflects varying views about the frequency and quantity of coming interest-rate increases; the Fed’s plans for and ramifications of shrinking its monster balance sheet after $5 trillion in emergency bond purchases; and the true state of an economy turbocharged by fiscal and monetary policy and not yet through the pandemic.
The labyrinth of scenarios for how monetary tightening is conducted and plays out is a web of trade-offs that have only gotten more unattractive as inflation surges and economic growth slows from lofty levels. The Fed is late in removing stimulus that, with the benefit of hindsight, was far too excessive, especially in conjunction with massive fiscal aid. The central bank’s largess might have staved off a worse recession and market correction in 2020, when the Covid pandemic first reached the U.S. in force and the economy effectively closed. But it has contributed to an inflationary mess that is getting more painful to address. The risks of a policy failure are big and growing, threatening job losses and market bloodshed to fight inflation, persistently higher prices to avoid recession, and, in a worst-case scenario, all of that at once.