That chill in the air is not simply the onset of autumn, according to some experts who say Americans need to brace for the arctic winter chill of a recession.
Friday ended a week in which Wall Street took a beating, The Dow Jones index dropped 486.27 points to close at 29,590.41, its first close below 30,000 since June, according to CNBC. The tumble meant that whatever had been gained since November 2020 has been lost, according to The Washington Post.
With inflation so far appearing to be unchecked, CNBC’s September Fed survey of financial experts gave the economy a 52 percent chance of turning into a recession in the next year, according to CNBC.
Steve Hanke, a professor of applied economics at Johns Hopkins University, had a far less rosy view.
“The probability of recession, I think it’s much higher than 50 percent — I think it’s about 80 percent. Maybe even higher than 80 percent,” Hanke said. “If they continue the quantitative tightening and move that growth rate and M2 (money supply) into negative territory, it’ll be severe.”
The money supply is the amount of money estimated to be in the economy. As CNBC explained, when consumers have lots of money, prices rise because consumers are willing to spend what they have to get what they want.
A graph of the money supply from the St. Louis Fed shows the supply of dollars in the economy continually increasing from 1960 through early 2022.
In March 2020, the money supply was estimated at 15,988.6 dollars. As of July 1 of this year, the supply rose to 21,709.2, a 35.78 percent increase.
By way of context, from September 2014 to February 2020, the money supply increased 34.64 percent, meaning that in a little over two years, the money supply increased more than over almost five and a half years.
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Hanke said the Federal Reserve missed the boat, according to CNBC.
“They have really been searching for inflation and the causes of inflation in all the wrong places. They’re looking at everything under the sun, but the money supply. And in fact, they’ve doubled and tripled down on the argument that money has no relationship to economic activity or not a reliable relationship to economic activity and inflation,” he said.
“The Fed exploded the money supply, starting early 2020 at an unprecedented rate, and they don’t want this length to be visible between the money supply and inflation. Because if it is, the noose around their neck, and that’s the real problem,” he said.
The opposite extreme is now taking shape, he said.
“They are not addressing it correctly,” he said. “In the five months, we’ve seen broad money major in the United States flatline. It’s not growing at all. And now they’re going to introduce quantitative tightening, and what that’s going to do that will drive the money supply down, that will drive it down into negative territory if they keep this up.”
Hanke is not alone in glum predictions. DoubleLine Capital CEO Jeffrey Gundlach told CNBC, “I think the odds of a recession in 2023 are very high. I mean, I would put them at 75 percent.”
“The Fed should’ve done more earlier. The monetary policy has lags that are long and variable. But we’ve been tightening now for a while. And the impact of these tightenings is going to cumulate into a recession. … I do think the Fed should be slowing down on these rate hikes,” he said.
The Federal Reserve hiked interest rates last week, but Fed Chairman Jerome Powell, who last year had called inflation transitory, offered no guarantee of success.
“It’s very hard to say with precise certainty the way this is going to unfold,” Powell said, according to The Washington Post, adding, “No one knows whether this process will lead to a recession or, if so, how significant that recession would be.”
The New York Times noted that pessimism is starting to dominate on Wall Street, citing that Friday’s stock market close left the S&P 500 down 23 percent for the year.
“Investors are bracing for downward guidance from CEOs,” said Jeff Kleintop, chief global investment strategist at Charles Schwab. “We are stuck in this loop of weakening growth and higher and higher rates.”
Rising interest rates are “increasing the chance of recession,” said Kristina Hooper, chief global market strategist at Invesco.
