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Trust the Shrub
Put the pieces together, and stagflation — with the economy contracting and inflation still too high — is the likeliest outcome.
Federal Reserve Chair Jerome Powell reckons the US economy can skirt recession. But the odds are stacked against him — thanks to banking, politics, and even the weather.
In Powell’s view, the gravity-defying strength of American labor markets — on display again in jobs data published Friday, which showed a bumper increase last month — is smoothing the way for a soft landing, even after five percentage points of interest-rate hikes in little over a year.
“It’s possible that this time is really different,” the Fed chief told reporters last week after raising rates for a tenth straight time.
Still, a labor market that remains too-hot-to-handle means the Fed will have to hold rates higher for longer to quell inflation — the very reason recession risks are so high. And for Powell’s forecast to come true, the US economy will have to overcome three major obstacles, all pointing to a downturn in the second half of this year.
“My best guess is that economic growth will be sluggish in coming months,” says Karen Dynan, a professor at Harvard. “We are in for a slog.” That might not feel great, but it would mean an outright recession is avoided.
Still, it’s tough to make either soft landing or rolling recession the base case.
The latest reading from Bloomberg Economics’ recession probability model suggests that a downturn starting by July is a near certainty. Take that with a grain of salt — if there’s a lesson from the last few years, it’s that not much is certain. But the basic point, that a recession is more likely than not, still stands.
That’s bad news for Powell’s optimistic forecast. Worse, a shallow recession might not even be enough to do the job of bringing inflation back to target. On average, past downturns have only lowered core inflation by a limited amount, and with significant lags.
Put the pieces together, and stagflation — with the economy contracting and inflation still too high — is the likeliest outcome.
And stagflation is what Twitter's @agnostoxxx was calling for, along with Time Magazine who said "We're Heading for a Stagflationary Crisis Unlike Anything We've Ever Seen" as mentioned in my previous CommonStock post on November 10, 2022:
Good call Shrub!
Bloomberg.com
Hot Jobs Report Raises Odds Fed Keeps Rates Higher for Longer
The unexpected pickups in US hiring and wages last month increase chances the Federal Reserve will hold interest rates high for longer and potentially keep the door open to an 11th straight hike in June.
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