Worst of economic storm is still to come
There is good news about inflation – and bad. The good news is that inflation will soon peak and come down to more acceptable levels.
The bad news is that inflation will slow because the
The Biden administration and the Fed have allowed the inflation genie out of the bottle for the first time since the 1980s. The administration did so with passage of its
The result of the administration and Fed's policy largesse, coupled with COVID-related global supply chain disruptions and
Monetary policy produced housing bubble
At the same time, the Fed's excessively easy monetary policy produced bubble-like conditions in the equity, housing and credit markets. By the end of last year, equity valuations reached nosebleed levels, experienced only once before in the past century.
Meanwhile, housing prices rose to a higher level than that before the 2006 housing bust even in inflation-adjusted terms.
Thankfully, the Biden administration and the Fed no longer view inflation as a transitory phenomenon. Instead, the Fed is being allowed to take strong monetary policy action to bring inflation under control.
But now the Fed is becoming overly restrictive. With the economy showing clear signs of slowing, the Fed has raised interest rates in 75 basis point steps rather than by the more normal 25 basis points. Similarly, at a time when the stock and bond markets have already declined by about 20% since January, the Fed is on a path to withdraw market liquidity by as much as
One reason for expecting that the Fed might soon cause a recession is the fact that the Atlanta Federal Reserve now estimates that in the second quarter of this year, the economy probably contracted for a second consecutive quarter. Another is that the bond market is demanding higher yields for two-year
Among the reasons to fear that we are now headed for a hard economic landing is that mortgage rates have increased at their fastest pace in the past 30 years. The almost doubling in mortgage rates from 3% at the start of the year to nearly 6% now is causing housing demand to crumble as homes become less affordable.
It also has to be of concern that consumer confidence has declined to its lowest level in more than a year. It has done so as households have to cope with high inflation and with big losses in their 401(k)s. Since the start of the year, more than
Further casting a dark cloud over the economy is the difficult environment for our exporters. As interest rates have been raised, the dollar has soared to a 20-year high, making our exports less competitive abroad.
At the same time, our main trade partners are experiencing difficulties of their own that reduce the size of our export markets. The Chinese economy is stumbling as a result of President
All of this likely means that inflation will soon peak and begin to decline in a meaningful way. It will do so first as a result of the 20% decline over the past few months in international commodity prices in general and in oil prices in particular. It will then do so as an impending economic recession opens up slack in the labor and product markets.
It also likely means that by early next year, we will have a hard economic landing and disorderly financial markets. If that does occur, inflation will be the least of our economic problems.
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