**The Odds Don’t Favor the Fed’s Soft Landing**
**Inflation is higher, the labor market tighter and real rates more negative than in past periods when the Fed raised rates without causing a recession**
**by Greg Ip, The Wall Street Journal, 3/23/2022**
**Inflation is much further from the Fed’s objective and the labor market, by many measures, tighter than in previous soft landings [1965, 1984 and 1994], yet the Fed starts with real interest rates — nominal rates adjusted for inflation — much lower, in fact deeply negative. In other words, not only is the economy already traveling above the speed limit, the Fed has the gas pedal pressed to the floor. The odds are that getting inflation back to the Fed’s 2% target will require much higher interest rates and greater risk of recession than the Fed or markets now anticipate....** [end quote]
The article discusses several issues impacting the supply of goods and the labor market. It may be possible for the Fed to tamp down inflation and engineer a soft landing (no recession) but not likely.
The article doesn’t mention that all three of the previous soft landings occurred before the Fed began to intervene heavily to juice the economy and the markets with ultra-low interest rates long after the 2001 recession ended. The Fed followed the same policy after the 2008-9 and 2020 recessions, pumping vast amounts of monetary stimulus by Quantitative Easing (buying bonds at longer durations, not just the overnight fed funds rate).
Despite jawboning that they want to reduce inflation, the Fed is still doing QE (and will until May 2022).
The historic neutral rate for the overnight rate is 2.5% and the historic neutral rate for the 10 year Treasury is 2.5% over the inflation rate.
I posted links to several charts a few days ago that show the historic data.
Greg Ip is an excellent reporter who presents a balanced analysis. He doesn’t want to sound unduly alarmist. But his underlying message is that the Fed will likely either fail to quell inflation or cause a recession…or both. Ip did not mention the dreaded “stagflation” scenario which is quite likely.
**Most Wall Street Experts Now Predict Stagflation — Here’s What That Means For Investors And The U.S. Economy**
**by Sergei Klebnikov, Forbes, Mar 15, 2022**
**Investor sentiment is growing increasingly bearish, with expectations for global economic growth plunging to their lowest level since the collapse of Lehman Brothers during the Great Financial Crisis of 2008, according to Bank of America’s monthly survey of roughly 300 respondents managing a collective $1 trillion in assets.**
**Concerns over inflation, which had appeared to be abating earlier this year, came roaring back in March, with over 60% of investors predicting the U.S. economy will take a hit from stagflation — more than double the amount who said so last month....The majority of professional investors see rising recession risks ahead once more, with 60% predicting a bear market in 2022 and over 50% expecting that high inflation will be “permanent.”...** [end quote]
“Permanent” is a looonnnngggg time. But those of us who experienced the stagflation of the 1970s know that it feels like foorrrevvver. And the inflation was brought to an end by Paul Volcker raising interest rates and inducing the 1980-82 recession with prolonged high unemployment.
The markets are in a bubble. Addicted to 20 years of ultra-easy lending.
Will the landing be soft?
Time will tell.