Fed has to ‘stick to their guns’ as economy slows
Baird Investment strategy analyst Ross Mayfield discusses the Fed’s handling of inflation.
Is the U.S. economy on the cusp of a recession? According to Bank of America's newest chief economist, the answer is yes.
Michael Gapen, the head of U.S. economics at Bank of America, told FOX Business that he expects the Federal Reserve to inadvertently trigger a downturn this year with its war on inflation.
"This cycle probably ends in a mild downturn," Gapen said. "How do I come to that? It's basically just history. It's really hard to achieve a soft landing."
Although Fed policymakers are counting on finding that elusive sweet spot – known as a soft landing – as they hike interest rates at the fastest pace in three decades, history shows that the U.S. central bank often struggles to successfully thread the needle between tightening policy and preserving economic growth.
FED LIKELY TO CONTINUE WITH RAPID INTEREST RATE HIKES DESPITE INFLATION RESPITE
Recent research from Alan Blinder, a former Federal Reserve board vice chairman and a Princeton economist, identified 11 tightening cycles since 1965, of which eight were followed by recessions. Still, that doesn't mean a severe recession is guaranteed: There were five very mild recessions in which GDP fell less than 1%, or there was no economic decline at all.
Fed Chairman Jerome Powell had previously identified three examples, in 1965, 1984 and 1994, when the Fed tightened monetary policy, reduced inflation, and saw no decline in growth.
Gapen projected that a recession would likely be mild rather than prolonged.
"Am I saying that the Fed blows it? No," he said. "They have an interest rate policy and balance sheet tools, and they're kind of blunt instruments. It's hard to precisely target things. That's not the way our economy works, just historically you're more likely to get something worse than a soft landing."
There are growing fears on Wall Street that the Fed could inadvertently send the economy into a recession as it takes a more aggressive approach to fighting inflation, which is at a multi-decade high. Policymakers have approved four consecutive rate hikes, including back-to-back 75 basis point increases. They have confirmed that another super-sized increase is on the table in September as they remain "strongly committed to returning inflation to its 2% objective."
Jerome Powell said during his post-meeting press conference in July that another 75-basis point hike could be appropriate in the future but that it ultimately hinges on upcoming economic data.
HOW THE FEDERAL RESERVE MISSED THE MARK ON SURGING INFLATION