A lot of people expect the Fed to keep raising rates to drive “the economy” into a recession. They don’t give much thought to the route we’d take to get there; What sub-sectors of the economy are (or are not) taking the most damage right now? Banking and Commercial Real Estate (CRE). They are already bending. Pressed harder for longer, those sectors will break. That break would likely cause the recession so many seek.
So that belief boils down to the Fed will raise rates and force a Banking and Commercial Real Estate crisis (to get that hoped-for recession).
That belief boils down to the Fed has the courage and/or stupidity to call in an airstrike on its own position.
I don’t believe Powell has that courage. He’s a politician. He also isn’t stupid. It would be a horrendous mistake for his reputation, the Fed’s independence, and the economy as a whole. Better to suffer the ghastly fate of… 2.75% inflation.
Is that a forecast from some left-loony MMT opinion? No. The Cleveland Fed’s Center for Inflation Research put this paper out 3 months ago. I’m reading “would not be optimal” as Fed-speak for “fantastically stupid…”
“Our model projects that… core PCE inflation moderates to only 2.75 percent by the end of 2025: inflation will be higher for longer. A deep recession would be necessary to achieve [2% inflation]. A simple… welfare analysis… suggests that such a recession would not be optimal.
This is Powell’s way out…
More on why blowing up the Banks and Real Estate would be an airstrike on the Fed’s own position tomorrow.
