Financial market investors are concerned that the US is on the brink of economic downturn as central bankers in Jackson Hole reaffirmed their intention to raise interest rates to control inflation.
Steve Hanke, professor of applied economics at Johns Hopkins University, said he thinks the US is heading for a “massive” recession next year, but that’s not necessarily due to higher benchmark interest rates.
“We’re going to have a recession because we’ve had five months of zero money supply growth — zero money supply growth, and the Fed isn’t looking at that,” Hanke said in an interview with CNBC on Monday. “We will face a major recession in 2023.”
M2 is a measure of the money supply that includes cash, current deposits, savings and stocks in retail money mutual funds. The M2 scale is widely used as an indicator of the amount of currency in circulation, and has been stagnant since February 2022, following “unprecedented growth in the money supply” starting with the COVID-19 pandemic in February 2020. (See chart below)
“There has been no sustained inflation in the history of the world – that is, inflation above 4% for about two years – that was not the result of the unprecedented growth in the money supply, which we started with COVID in February of 2020,” Hanke said. “That’s why we have inflation now, and that’s why, by the way, we’ll continue inflation until 2023 until probably 2024.”
U.S. inflation eased in July with the consumer price index rising 8.5% from a year earlier, down from a 41-year high of 9.1% in June, raising hopes that price hikes may have peaked.
But according to Hank, last year he predicted that US inflation would be somewhere between 6% and 9% in 2022. “We hit the target with this model. Now, the model is running between 6% and 8% at the end of this year based on Annually, and 5% at the end of 2023 through 2024.
We see: Fed likely needs to push rates above 3.5%, and keep them there until 2024, says Williams
However, Powell reiterated in his Jackson Hole speech last Friday that the central bank still plans to continue raising interest rates to bring inflation back to its 2% target, even if it leads to “some pain” for US households and businesses.
“The problem we have is that the president doesn’t understand, even at this point, what causes inflation and what causes it,” Hanke said. “He still talks about supply-side glitches. He fails to tell us that inflation is always caused by excess growth in the money supply, and the running of printing presses.”
Hanke is not the only one predicting a deeper economic slowdown that could last into 2024. Stephen Roach, former head of Morgan Stanley Asia and a former economist at the Federal Reserve, warns that the US needs a “miracle” to avoid a recession.
“We will definitely have a recession as the late effects of this major monetary tightening begin,” Roach told CNBC on Monday. “They are not running at all at the moment.”
Roach said President Powell had no choice but to take Paul Volcker’s tough line. Volcker served as the 12th Chairman of the Federal Reserve from 1979 to 1987. During his tenure, Volcker raised interest rates aggressively and succeeded in wresting inflation out of the economy, but at great cost—pushing the economy into two back-to-back recessions with the stock market crash and high unemployment.
Go back to the kind of pain Paul Volcker had to inflict on the US economy to curb inflation. “He had to take the unemployment rate above 10%,” Roach said.
We see: Job opportunities increased to 11.2 million and show that the US labor market remains strong
The unemployment rate returned to its pre-pandemic level in July and was pegged to the lowest level since 1969. Nonfarm payrolls rose by 528,000 in July, and the unemployment rate held steady at 3.5%.
However, markets are awaiting the US jobs report for August which is due on Friday. Wall Street estimates that nonfarm payrolls will show the economy adding 318,000 jobs in August. The unemployment rate is expected to hold steady at 3.5%, while average hourly earnings are expected to rise 0.4% after a 0.5% rise in the previous month.
We see: Financial conditions show ‘cracks’ as stocks swoon and recession looms, warns Wells Fargo
US stocks traded lower on Tuesday, continuing their losing streak for the third consecutive session. Dow Jones Industrial Average DJIA,
It fell 230 points, or 0.7%, to 31,860 points. S&P 500 SPX Index,
It lost 37 points 0.9% to 3,993. Nasdaq Composite,
It fell 121 points, or 1%, to 11,896 points. Three major indices are on track to close below the 50-day moving average for the first time since July 18, 2022, according to market data from Dow Jones.