By Louis Juricic
The U.S. economy is heading for a hard landing, and a recession is coming within 12 to 18 months, wrote former president of the Federal Reserve Bank of New York, Bill Dudley, in an opinion column for Bloomberg Economics.
Dudley noted that the Fed’s latest set of projections laid out a benign scenario amid rising interest rates, but he sees several reasons to expect a “much harder landing.”
The central bank’s employment mandate is now subservient to its inflation mandate, and the new focus on price stability will be “relentless.”
“Fed officials recognize that failing to bring inflation back down would be disastrous: Inflation expectations would likely become unanchored, necessitating an even bigger recession later. From a risk management perspective, better to act now, whatever the cost in terms of jobs and growth. Powell does not want to repeat the mistakes of the late 1960s and the 1970s,” wrote Dudley.
It will take time for considerable monetary policy tightening to have an effect, but the economist thinks the expansion is uniquely vulnerable to a sudden stop. As inflation outstrips wage growth, the personal savings rate has plummeted, from 26.6% in March 2021 to 4.4% this April, significantly below its long-run average.
“No wonder consumer sentiment has fallen to levels last reached in the aftermath of the 2008 financial crisis, and Google searches for the word ‘recession’ are hitting new records," he added.
Dudley concluded, "The Fed has never tightened enough to push up the unemployment rate by 0.5 percentage point or more without triggering a recession … Much like Wile E. Coyote heading off a cliff, the US economy has plenty of momentum but rapidly disappearing support. Falling back to earth will not be a pleasant experience."