Let’s not pretend that challenging economic times aren’t becoming obviously visible on the horizon. When The Federal Reserve Chairman, Jerome Powell, insists that businesses and households will experience pain resulting from monetary tightening, you better believe him. What happened?
When central banks around the world raise interest rates in a fast manner, growth slows down also in a fast manner. The decisive effort of the Federal Reserve Board to control rapidly increasing inflation is a sign of declining faith in their ability to reach their goal in the time frame they wish. There’s a saying in finance that one could accurately predict prices or time frame, but never both. Why anyone would believe the US Central Bank can reverse nearly 40 years of economic damage in a year or two is a discussion for another day…or decade. In any case, the last 40 years we thought of inflation as an unwelcomed stranger.
The Bank of England made a drastic move last month buying gilts (British long-term government bonds), with a harsh ripple effect that caused the pound to plummet and government debt cost to soar. Meanwhile, investors in the USA fiercely cross their fingers and use the threat of an economic default in The Motherland to put pressure on the US Central Bank to lean at their mercy. They’ve pivoted before, so what’s different now?
A soft landing would avoid a recession. In a perfect economy, Central Banks begin a cycle of raising interest rates to stop the economy from “overheating” and to slow down growth. If done properly, the economy rebounds shortly after. But economies are not perfect, and ours is about to burst into flames. The last time the Fed achieved a soft landing was in 1994, during Alan Greenspan’s term as Fed Chairman. Fed Funds rate rose from 3% to 6%. Inflation stayed at bay, and a year later the economy boomed again. This was the first successful soft landing in 50 years.
Jerome Powell deploys admirable tactics that Paul Volcker used in the early 1980s. He also uses measures from Alan Greenspan’s intervention in the mid- 1990s. Unlike his predecessors', Powell’s environment is quite different. A lingering post-pandemic supply chain crisis, the Russo-Ukrainian war causing surging oil prices, the COVID-19-driven shutdowns of China’s labor force in 2022, and now U.K.’s government debt crisis, are all producing a ricochet effect for our economy. More so, it would be unreasonable to conclude that interest rate hikes can control economic strains such as the growing demand for labor and wage increases, or the events discussed above. Soft landings can be well orchestrated, but history proves they’re very hard to achieve.
No Sign of a Soft Landing