Fed Raising Recession Risks

[WHITT]

The Federal Reserve faces a growing risk of making a policy mistake, tipping the economy into a recession, as it confronts decades-high inflation that's proving more persistent and broad-based than policy makers expected.

After holding interest rates near zero since the start of the pandemic, Fed Chair Jerome Powell and his colleagues are poised to embark on a credit-tightening campaign next month, with some economists forecasting an outsized half percentage-point increase to start the cycle.

The danger is that, with price gains far above its 2% target, the Fed will be pressured into overdoing it -- pushing the economy into a downturn by rapidly raising borrowing costs for consumers and companies, and cratering financial markets that have grown used to its ultra-expansionary monetary policy. Economists from both sides of the political spectrum see rising risks of a recession.

Traders in the money markets are wagering on roughly six quarter percentage-point increases by the Fed this year. Layered on top of those hikes will be a yet-to-be-specified reduction in the Fed's balance sheet, which now stands at $8.9 trillion. That will take liquidity out of the financial system -- potentially unsettling bond and stock markets.

"The Fed is tightening into a slowdown," Sarah House, senior economist at Wells Fargo Securities, said. "That does point to some risks around if they go too fast."

https://www.bloomberg.com/news/articles/2022-02-12/fed-rush-to-catch-up-on-inflation-raises-u-s-recession-risks

[Amishman]

1. Shrinking the balance sheet should be the easier option

Financial markets have been over capitalized and awash in excess liquidity for a while. Start reducing the money supply first and foremost

[WHITT]

4. I Agree

and have posted that previously, instead of raising interest rates into an economic slowdown.

[NickB79]

2. How does a recession work when there are 10 million empty job openings?

Do those empty jobs act as a buffer against future job losses?

[WarGamer]

3. It's a conundrum.

Reduce inflation or kill the stock market.

[Tomconroy]

5. Six raises would add a point and a half to interest rates.

That shouldn't send us into a recession. I think.

[WHITT]

6. Except

the economy has already slowed.