Is Fed inducing us through Recession and Hard Landing ?

The Federal Reserve of the United States has been battling rising inflation, which has been fueled by supply chain disruptions, labor shortages, and soaring energy prices. To combat this, the Fed has increased interest rates, hoping to slow down economic activity and decrease the demand for goods and services. However, a TD Securities strategist, Priya Misra, has warned that the Fed has no choice but to push the US into a recession to bring down inflation. Misra stated that strong data would force the central bank to remain aggressive in its tightening of monetary policy, which could result in a downturn by mid-year.

Hard Landing: The Pros and Cons of Tackling Inflation Through a Potential Fed-induced Recession
Hard Landing: The Pros and Cons of Tackling Inflation Through a Potential Fed-induced Recession

Misra predicted that rates would reach 5.25-5.75% this year, an increase of at least 75 basis-points from the current target of 4.5%-4.75%. She added that officials weren’t likely to pause or cut rates until prices start to near the Fed’s 2% inflation target, which could take until the third or fourth quarter of 2023. Misra said that data is likely to continue coming in hot because Fed rate hikes work with a lag, and it takes 12-18 months for the full effect of Fed tightening to be felt in the economy.

Meaning of Hard Landing

In economics, a “hard landing” refers to a situation where an economy experiences a rapid and sharp decline in growth, often resulting in a recession. This type of landing is usually caused by monetary or fiscal policies that are aimed at cooling down an overheated economy, particularly to address inflation. In the case of the Federal Reserve (the “Fed”), a hard landing could result from raising interest rates too quickly or too aggressively, which could lead to a significant reduction in borrowing and spending, and ultimately, a contraction in economic activity.

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A hard landing can be characterized by a steep decline in GDP, rising unemployment, falling asset prices, reduced consumer spending, and a contraction in credit availability. These factors can lead to a negative feedback loop, where lower spending leads to lower business profits, which leads to further job losses and lower consumer spending, perpetuating the downward spiral.

While a hard landing can be a painful and challenging experience for an economy, it can also be necessary to address issues such as inflation, overheating, or unsustainable levels of debt. However, the decision to pursue such a strategy is often a delicate balancing act between addressing immediate economic concerns and avoiding long-term damage to the economy.

Pro & cons of Hard Landing

Possible Pros of the Fed’s Push into a ‘Hard Landing’ Recession to Tackle Inflation:

Reduced Inflation: One of the main benefits of a hard landing recession is that it can significantly reduce inflation. By slowing down the economy, the Fed can put downward pressure on prices, reducing inflationary pressures that may have been building up.

Improved Labor Market: Although a hard landing recession would likely lead to job losses, it could also lead to an improved labor market in the long run. By reducing inflation, the Fed can create a more stable economic environment, leading to more sustainable job growth in the future.

Preventing a Bubble: If the Fed believes that the economy is overheating and that a bubble is forming, a hard landing recession can be a way to prevent it from getting worse. By slowing down economic activity, the Fed can prevent asset bubbles from getting out of control, which can lead to a more severe recession in the future.

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Possible Cons of the Fed’s Push into a ‘Hard Landing’ Recession to Tackle Inflation:

Economic Pain: A hard landing recession can be extremely painful for many people. It can lead to job losses, business closures, and a general sense of economic hardship. While the Fed’s goal of reducing inflation may be achieved, it can come at a high cost for individuals and families who are struggling to make ends meet.

Uncertainty: A hard landing recession can also create a sense of uncertainty and fear among investors and consumers. This can lead to a decrease in consumer spending and a decrease in business investment, both of which can further slow down the economy.

Political Backlash: If the Fed pushes the economy into a hard landing recession, there may be political consequences. The public may blame the Fed for the economic pain that they are experiencing, and politicians may try to use this as an opportunity to criticize the Fed and push for changes to its policies.

Overall, while a hard landing recession may be a tool that the Fed can use to tackle inflation, it is not without its risks and potential negative consequences. The decision to push the economy into a hard landing recession is a difficult one, and the Fed must carefully consider the costs and benefits of this strategy before taking action.

Some experts are concerned that over-tightening monetary policy could lead to a recession, as the economy slows down too much. Professor Jeremy Siegel of the Wharton School of the University of Pennsylvania warned that the Fed is slamming on the brakes way too hard, and the risks of a recession are extremely high if they continue to hike rates through the early part of next year.

While the Fed’s goal is to decrease inflation, a hard landing recession could have severe consequences for the economy, including high levels of unemployment, a decrease in the value of assets, and decreased consumer spending. As such, the Fed needs to balance its efforts to control inflation with ensuring that the economy does not suffer unduly.

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