Investors in financial markets are worried that the US is on the brink of an economic recession as central bankers in Jackson Hole reaffirmed their determination to raise interest rates to bring inflation under control.
Steve Hanke, a professor of applied economics at Johns Hopkins University, said he thinks the U.S. is headed for a recession next year, but not necessarily because of higher benchmark interest rates.
“We’re going to have a recession because we’ve had five months of zero M2 growth — money supply growth and the Fed isn’t even looking at it,” Hanke said in an interview with CNBC on Monday. “We’re going to have a massive recession in 2023.”
M2 is a measure of the money supply that includes cash, checking and savings deposits, and shares in retail money mutual funds. Widely used as an indicator of the quantity of currency in circulation, the M2 measure has been stagnant since February 2022, following “an unprecedented increase in the money supply” starting with the COVID-19 pandemic in February 2020. (See chart below)
“There has never been sustained inflation in world history – meaning inflation above 4% for about two years – that was not the result of the unprecedented increase in the money supply that we had starting with COVID in February 2020,” Hanke said. “That’s why we have inflation now and that’s why, by the way, we’ll continue to have inflation through 2023 and probably 2024.”
US inflation eased in July with the Consumer Price Index rising 8.5% from a year ago, from a 41-year high of 9.1% in June, raising hopes that the rise in the price level may have peaked.
But according to Hanke, he predicted last year that US inflation would be somewhere between 6% and 9% in 2022. Now the model is running between 6% and 8% at the end of this year on an annualized basis and 5% at the end of 2023 for 2024,” he told CNBC.
I see: Fed likely needs to push rates above 3.5% and keep them there until 2024, Williams says
However, President Powell confirmed in his speech in Jackson Hole last Friday that the central bank still plans to keep raising interest rates to bring inflation back to the 2% target, even if that results in “some pain.” for US households and businesses.
“The problem we have is that the president doesn’t understand, even at this point, what the causes of inflation are and what they were,” Hanke said. “It still continues with supply-side malfunctions. He didn’t tell us that inflation is always caused by an excessive increase in the money supply, turning on the printing presses.”
Hanke is not alone in predicting a much deeper economic recession that could last until 2024. Stephen Roach, former chairman of Morgan Stanley Asia and former economist at the Federal Reserve, warns that the US needs a “miracle” to avoid recession.
“We’re definitely going to have a recession as the lingering effects of this significant monetary tightening start to kick in,” Roach told CNBC on Monday. “They’re not in at all right now.”
Roach said President Powell has no choice but to take a Paul Volcker approach to tightening. Volcker served as the 12th chairman of the Federal Reserve from 1979 to 1987. During his tenure, Volcker aggressively raised interest rates and successfully kicked inflation out of the economy, but at great cost—leading the economy to two consecutive recessions. recession with stock market crash and high unemployment.
“Go back to the kind of pain that Paul Volcker had to inflict on the US economy to neutralize inflation. It had to get the unemployment rate above 10 percent,” Roach said.
I see: Jobs rose to 11.2 million, showing the US labor market remains strong
The unemployment rate returned to pre-pandemic levels in July and hit the lowest level since 1969. Nonfarm payrolls rose by 528,000 in July and the jobless rate stood at 3.5%.
However, markets are awaiting the US jobs report for August, which is scheduled for release on Friday. Wall Street estimates nonfarm payrolls will show the economy added 318,000 jobs in August. The unemployment rate is forecast to remain steady at 3.5%, while average hourly earnings are expected to rise 0.4% after rising 0.5% in the previous month.
I see: Economic conditions show ‘cracks’ as stocks fall, recession looms, Wells Fargo warns
U.S. stocks were lower on Tuesday, extending a losing streak to a third straight session. Dow Jones Industrial Average DJIA,
fell 230 points, or 0.7%, to 31,860. The S&P 500 SPX,
lost 37 points or 0.9% to 3,993. The Nasdaq Composite COMP,
fell 121 points, or 1%, to 11,896. Three major indexes are poised to close below their 50-day moving averages for the first time since July 18, 2022, according to Dow Jones Market Data.