History says Fed won’t hit inflation target without recession

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Friday, December 16, 2022

today’s newsletter Jared Blikre, a reporter focusing on the Yahoo Finance markets. follow him on twitter @SPYJared. Read this and more market news on the go Yahoo Finance App.

Forget soft landing in 2023.

Should the Fed meet its target of reducing inflation, it’s nearly impossible to guarantee a punishing recession next year caused by the rapidly deteriorating labor market.

Like Yahoo Finance Myles Udland revealed In Thursday’s Morning Summary, Fed Chairman Powell challenged his credibility at his recent press conference as he tried to justify a possible soft landing next year, which saw inflation fall before the economy contracted.

Powell has struggled to fit the FOMC’s own forecasts for the economy next year into a narrative that avoids a hard landing or recession.

Powell slammed the strong job market and said, “There is an imbalance between supply and demand in the labor market,” and did not underestimate his remarks, noting that it would take “significant time” for the labor market to stabilize again.

Federal Reserve Board Chairman Jerome Powell looks at a press conference at the Federal Reserve Building in Washington, USA on December 14, 2022, after the Federal Reserve announced that it was raising interest rates by half a percentage point. REUTERS/Evelyn Hockstein

The issue for the Fed was inflation, which is currently well above the 2% target.

Headline inflation measured by the Consumer Price Index (CPI) in November came with 7.1% compared to the previous year. In June of this year, inflation peaked north of 9%.

Fed’s Forecasts released on Wednesday It showed inflation slowing next year as unemployment rose. But with inflation at 3.5% by the end of 2023, the Fed’s own projections show that prices are still rising at an unacceptable rate.

And such Alfonso “Alf” Peccatiello and Macro Compass Notes, a recession is one surefire way to reduce inflation.

Every recession since 1960, except for the pandemic-induced recession in 2020, began with inflation at 3.7% or higher. And it was only in 1974 that the recession ended when inflation rose above 2.7%.

Modern economic history shows that recessions reduce inflation. And the current Fed is more focused on achieving the second than avoiding the first. (Source: Macro Compass)

For Powell and the Fed, it is also argued that the labor market outlook is less uncertain, despite their insistence on 0.5% GDP growth in 2023, providing evidence refuting the recession proposals that were drawn from their forecasts.

this Sahm Rule It is a relatively new Fed model that accurately predicts the last nine recessions and does it in real time much faster than officially announced. The recession alarm is triggered when the three-month moving average of the unemployment rate rises 0.50% above the 12-month low.

The current 12-month low in unemployment is 3.5%. So, if the 3-month average rises above 4.0% and this indicates that the economy is already in recession.

Even if we mark this local low from the 3.7% unemployment rate in November and move the Sahm Rule trigger to 4.2%, the Fed’s outlook still looks dubious. The Fed projects an unemployment rate of 4.6% by the end of next year, so it’s easy to see where the error lies in the central bank’s argument.

However, if we take Powell’s comments together with the Fed’s forecasts, we see that any anti-recession argument is mostly academic.

The goal of this Fed is to reduce inflation and drastically reduce it.

“Without price stability, the economy is no good to anyone,” Powell said on Wednesday.

And the path to that stability—read: 2% inflation—is the labor market.

“There will be some softening in labor market conditions,” Powell said. “I wish there was a completely painless way to restore price stability. No. And that’s the best we can do.”

What to Watch Today?

Economy

09:45 ET: S&P Global US Manufacturing PMIDecember Preliminary (expected 46.9, previous month 46.4)
09:45 ET: S&P Global US Services PMIDecember Preliminary (47.8 expected, 47.7 previous month)
09:45 ET: S&P Global US Composite PMIDecember Preliminary (46.5 expected, previous month 46.2)

Earning