A 2023 recession is 'inevitable' as the war on inflation slows down the economy, former New York Fed president says
- It's "inevitable" that the US enters a
recessionin 2023, former NY FedPres. Bill Dudleysaid Wednesday.
- The recovery will last through 2022, but rising interest rates will tank demand, he added.
Bill Dudley, former president of the
After a rapid recovery from the coronavirus crash, the Federal Reserve is trying to softly land the
More pessimistic experts, including Dudley, view a
"Much like Wile E. Coyote heading off a cliff, the US economy has plenty of momentum but rapidly disappearing support," Dudley said. "Falling back to earth will not be a pleasant experience."
The latest signs that the landing will be a hard one emerged last week. The Fed raised its benchmark interest rate by 0.75 percentage points for the first time since 1994, citing the hotter-than-expected inflation in May as the reason for its larger hike. Updated economic projections published on June 15 also showed Fed officials anticipating higher unemployment and weaker growth through 2023 than they expected just three months prior.
Though the Fed is pursuing both 2% inflation and maximum employment, the latter is "now subservient" to the former, Dudley said.
"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," he added.
The Fed chair still sees a soft or "softish" landing as a possibility. The economy is "very strong and well positioned to handle tighter monetary policy," Powell told the Senate Banking Committee in a Wednesday hearing. Raising interest rates could undo some of the hiring recovery, but cooling inflation is necessary for the country to "have the labor market that we really want," he added.
Still, precedent suggests the Fed won't engineer the perfect cooldown. In every instance that central bank tightening has lifted unemployment by just 0.5 percentage points, the US has fallen into a recession, Dudley said.
Americans are bracing for the worst as well. Consumer sentiment sits at the lowest point on record, dragged lower by soaring gas prices and swelling fears of a downturn. Google searches for "recession," meanwhile, are hitting all-time highs.
Yes, the recovery is still moving forward, and it's unlikely a recession shows up in 2022, Dudley said. But with inflation at four-decade highs and the Fed likely to keep hiking rates at a breakneck pace, a downturn is looking increasingly likely.
"If you're still holding out hope that the Federal Reserve will be able to engineer a soft landing in the US economy, abandon it," Dudley said.
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