Blog: "Soft Landing" is off the table

A Bloomberg article today mentioned that Powell has dismissed the possibility of a "soft landing" and is now going for a "growth recession" which sounds like an oxymoron. But it seems to mean that they're hoping for a mild contraction which still does not have high unemployment.

So it won't qualify as a recession by the NBER. That's a good goal, but I'm still skeptical. For one thing, the underlying inflation trend is still up. A couple of weeks ago I mentioned here that the other more reliable inflation indicators like "trimmed mean CPI" showed no signs of falling back. On Friday the PCE equivalent showed the same thing. At the same time, Powell said that fighting inflation now had a priority over preserving employment. So more rate hikes are forthcoming.

But the danger to the economy is not typically that the Fed overshoots. It's more that the Fed slows the economy down, putting it in a fragile state, and an exogenous shock knocks the economy into recession. That's what happened in 1990 when Iraq invaded Kuwait sending oil prices soaring. In a fragile state the economy and the market are susceptible to shocks. It's usually the unknown unknowns that get us, not the known unknowns.

As rates rise, financial instability risks will increase as well.  With markets in a state of high uncertainty and high inflation, the road looks pretty rocky ahead.