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Opinion | Will the Fed Cause a Recession?

Making matters worse, the emergency pandemic assistance that contributed to the current bout of inflation by amplifying consumers’ buying power is going away like a receding tide. Rosenberg calculates that fiscal stimulus passed by Congress added five percentage points to the rate of economic growth a year ago, but the subsequent expiration of pandemic aid will reduce the economy’s growth rate by nearly three percentage points by the end of this year.

To be sure, Rosenberg is more bearish than most economists and policymakers. On Wednesday the Fed released a survey of Fed governors and reserve bank presidents showing median projections for economic growth of 2.8 percent this year and 2.2 percent in 2023. “We do feel that the economy is very strong and well positioned to withstand tighter monetary policy,” Powell said at a news conference on Wednesday.

Capital Economics told clients on Wednesday, before the Fed’s announcement, that it puts the risk of a recession in the next 12 months at just 2 percent. I spoke to several other experts before the announcement who were also more optimistic than Rosenberg. Kathy Bostjancic, chief U.S. economist of Oxford Economics, wrote to me in an email that a Fed-induced recession “is a low but rising risk for 2023.” For now, she wrote, “strong momentum, a very healthy labor market and a healthy consumer balance sheet should keep growth humming this year.”

James Hamilton, an economist at the University of California, San Diego, told me the federal funds rate is too low, especially given bottlenecks in the economy that restrain supply, and while higher rates will curb growth, “based on what’s happened so far I don’t think it’s enough to cause a recession.” Guy LeBas, chief fixed-income strategist for Janney Montgomery Scott in Philadelphia, took a similar line, saying that recessionary factors “get weighed out by strong job and wage growth in the short term.”

Barry Ritholtz, an investor and blogger, wrote on Monday that Fed officials understand the danger of raising rates too quickly. “The Fed wants to get off of its emergency footing,” he wrote. “They are jawboning against inflation, but they understand exactly how ineffectual increases are in the current environment.” He said that he would like to see the Federal Open Market Committee “return to a more normal footing — eventually — but those expecting fast, fat and frequent rate hikes might be setting themselves up for disappointment.”

The biggest danger from today’s inflation is that expectations of high inflation become embedded in the markets and the views of consumers and businesses. But there’s not much evidence of that yet. The Federal Reserve Bank of New York surveys consumers about their expectations for inflation three years ahead. The median expectation in February, 3.8 percent, was barely higher than the median expectation of 3.4 percent when the survey began in June 2013 and actual inflation was under 2 percent.

Rosenberg said he’d like to see the Fed stop with the rate hikes after this month’s increase, even though he knows that his negativity is out of favor. “Most economists on Wall Street like to play it safe because that ensures your job longevity,” he said. “That’s why I started my own firm. My goal is not to make my clients happy. If it were I would have started Rosenberg Circus instead of Rosenberg Research.”

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