The Federal Reserve is making what seem to be all the appropriate noises to go along with its actions about taming inflation. But there's a stubborn belief in the markets that, somehow, the Fed will engineer a so-called “soft landing” in which there's a brief recession, followed by a rapid return to the good old days of loose money, low inflation and full employment.
Former New York Fed President Bill Dudley writes this is all hogwash, and that the Fed is not being honest about just how much pain is coming. The blame lies in the Fed's still way-too-rosy outlook and in particular its unemployment scenarios:
…the unemployment rate will have to go higher: Larry Summers has argued that it might have to be 2 percentage points higher than its long-term equilibrium level just to reduce underlying inflation by 1 percentage point per year. Second, the current relationship between job openings and unemployment, known as the Beveridge curve, suggests that the equilibrium level is actually about 5%. This implies a much higher unemployment rate would be needed to significantly reduce inflation. Third, the Fed's projections have no precedent: Never has the unemployment rate increased by 0.5% or more without a recession (as the economist Claudia Sahm famously noted), and never in post-war history has it risen by just 0.9 percentage point (after 0.5, the next stop is 2 percentage points).
Another worrisome sign: FOMC members appear to disagree about how long the central bank will stick with its inflation fight. All but one expect the federal funds rate to end 2023 somewhere between 4.25% and 5%, but the range widens to 2.5% to 4.75% at the end of 2024. And this isn't related to expectations that inflation will be vanquished by 2024. No more than a few forecast that it will have fallen to 2% by then.
The problem with crystal balls is they don't work, and that goes double for projecting specific economic conditions one, two or three years in the future (never mind one, two or three months).
Dudley's bottom line is what happens to the Fed's credibility, and its willingness to do whatever it takes to tame inflation, “when people realize that the job will be harder, and the pain greater, than the Fed has indicated?”
We may find out sooner than the Fed or Wall Street thinks.
The opinions expressed in this article are those of the author and do not necessarily reflect the positions of American Liberty News.
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The Feds? Really the most corrupt government agency! They screw over the American people and it doesn’t bother them. They can stop the madness but they don’t want to. They are not Americans. A bunch of rich elites hating the American people.
That sounds just like so many of the left wing liberal democrats these days
This is all hogwash. What we are currently experiencing is monitory inflation. The government has essentially been printing money to cover the huge federal deficit spending with nothing to back it up. The fed is acting as if this is consumer driven inflation. It’s not! In fact, consumer consumption of goods and services is DOWN year over year. With inflation at 8%, consumers would need to spend 8% more to consume the same amount of goods and services. Consumer spending is actually down a couple percent as is overall GDP. Thus consumption of goods and services is down about 10% with no reduction in inflation. Further proving this is monitory inflation.