An Economic Wild Card: Could the Medicine Kill the Patient?
Author: Greg Valliere
September 26, 2022
WE REITERATE OUR RANT LAST TUESDAY: The Fed is about to become politicized as Chairman Jerome Powell, who got inflation wrong last year, is now over-reacting. The Fed, it seems, is always behind the curve, fighting the last battle.
INCREDIBLY, POWELL SEEMS TO BE seeking a recession and a housing slump. Democrats fear this could hurt their election prospects, which have slipped a bit in recent days after surging around Labor Day. The slumping financial markets have boosted the GOP’s prospects.
TO BE BLUNT, there’s a growing chance that harsh monetary medicine could kill the patient. A leading proponent of this view is the renowned market guru Jeremy Siegel, who unloaded on the Fed last Friday on CNBC. The Fed, which should have tightened last year, is now tightening too aggressively — making the biggest mistake in its 110-year history, Siegel said.
AFTER KEEPING RATES STEADY as commodity inflation surged last year, the central bankers are now tightening dramatically even though there are clear signs that inflation has peaked. A recession is now likely, Siegel said (the Atlanta Fed’s third quarter GDP forecast is for growth of 0.3%).
SIEGEL SAID THAT to call the Fed’s monetary policy “absolutely poor” would be “an understatement.”
WE’LL GO OUT ON A LIMB and predict that the Fed may react to the market crash and economic softening by easing up a bit, hiking the funds rate by 50 basis points, not 75, at the early November meeting. That could be a relief to the markets.
BUT MORE RATE HIKES are likely into early 2023, as the Fed continues to tighten until achieving its extremely controversial goals: an economic slowdown and a housing slump. Be careful what you wish for . . .
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