Inflation is increasing day by day and is becoming out of control. Here, we will narrate some essential points from the inflations focusing experts. If the Fed succeeds in lowering inflation, a painful recession next year brought on by a rapidly worsening labour market is all but guaranteed.
Fed Chair Powell stretched credibility at his most recent press conference while seeking to make a case for a potential soft landing next year in which inflation declines without the economy collapsing, as Yahoo Finance’s Myles Udland detailed in Thursday’s Morning Brief.
Powell found it challenging to incorporate the FOMC’s own forecasts for the economy for the coming year into a story that doesn’t involve a harsh landing or recession.
When he said, “There’s an imbalance in the labour market between supply and demand,” Powell pounded home the robust employment market and didn’t hold back. He added that it would take a “considerable duration” to get the labour market back into balance.
The Fed has been concerned about inflation, which is presently running far higher than its 2% objective. The Consumer Price Index (CPI), which measures headline inflation, registered a 7.1% increase over the previous year in November. Inflation peaked in June of this year at a level above 9%.
According to the Fed’s predictions announced on Wednesday, inflation is expected to decelerate next year as unemployment increases. However, according to the Fed’s own predictions, inflation will reach 3.5% by the end of 2023, which is still an intolerable pace of price growth.
And as Alfonso “Alf” Peccatiello of The Macro Compass points out, a recession is a proven method to lower inflation.
Except for the 2020 pandemic-induced recession, every recession since 1960 has started with inflation running at 3.7% or higher. And the only time a recession ended with inflation above 2.7% was in 1974.
Another problem for Powell and the Fed is that, while their insistence that 2023’s forecasted GDP growth of 0.5% provides evidence disputing claims of a recession, the labour market situation is less cloudy.
A relatively recent Fed model known as the Sahm Rule has successfully predicted nine recessions in the past, and it did so far sooner than they were ever announced. When the unemployment rate’s three-month moving average rises more than 0.50% over its 12-month low, a recession signal is issued.
3.5% is the 12-month low for unemployment. Therefore, the economy is already in a recession if and when the 3-month average rises over 4.0%.
The picture for the Fed remains bleak even if we note this regional low from November’s unemployment rate of 3.7% and raise the Sahm Rule trigger to 4.2%. It’s simple to see where the central bank’s rationale is flawed, given that the Fed projects an unemployment rate of 4.6% by the end of next year.
However, when combined with Powell’s remarks and the Fed’s predictions, any attempts to prevent a recession wind up being mostly theoretical. Inflation reduction is the Fed’s primary objective, and it must be accomplished significantly.