Top economist Steve Hanke, known as the "money doctor," believes that the United States has not avoided a recession and that the economy is slowing too fast for a soft landing, pointing out that the Federal Reserve has "failed its job."
The Johns Hopkins professor pointed to signs of slowing U.S. economic activity, with inflation cooling from a peak of about 9% in 2022. Hanke predicted that on this trend, the consumer price index (CPI) is destined to fall below 3% by the end of this year and eventually below 2% as the economy contracts.
He added in a recent interview: “I think the economy is slowing down and it could put us into a recession by the end of this year or early next year.”
Hanke has been warning about this potential economic downturn for months, making him one of the last remaining bears on Wall Street. Most forecasters say the U.S. looks likely to avoid a recession. But Hanke points to a shrinking money supply, suggesting a synchronized slowdown in economic activity.
According to the Federal Reserve, the U.S. broad money supply (M2) has been shrinking for most of the past two years, and in early June this year, M2 money supply increased by only 0.5% year-on-year. In contrast, in early 2021, M2 money supply grew by 27% as the epidemic stimulus boosted economic activity.
The money supply growth rate is also well below Hanke's estimate of 6%, which is consistent with 2% inflation. Hanke said this suggests the Fed will need to ease monetary policy significantly if it intends to keep inflation at an appropriate level.
Regarding inflation falling below the Fed’s 2% target, Hanke said: “Interest rates are going to follow inflation, so interest rates are going to fall significantly.”
Fed officials are on track to quickly raise interest rates in 2022 and 2023 to tame surging inflation. Now, rates are hovering at their highest levels since 2001, a level that other experts warn could push the economy into contraction.
Hanke said Federal Reserve officials' monetary policy over the past few years deserves an "F" grade, or failing grade, because officials were slow to respond to the surge in money supply and the resulting surge in inflation.
"This is one of the worst performances of the Fed," Hanke said. "The average person on the street knows that if you stimulate the money supply, you get inflation. If you tighten monetary policy, you get a recession. The Fed has tightened monetary policy four times in its history since 1930, and each time it brought economic contraction and ultimately a recession."
Federal Reserve officials appear poised to cut interest rates later this year, but the outlook for a recession remains uncertain. The latest estimate from economists at the New York Fed puts the probability of a U.S. recession at 56% by June 2025.
Article forwarded from: Jinshi Data