The US economy will suffer a recession that could hit stock prices, Steve Hanke warned.
The veteran economist sees inflation tumbling and the Fed cutting interest rates later this year.
Hanke flagged the shrinking US money supply as the key reason why a recession lies ahead.
The US economy will slump into recession, putting stocks under pressure, Steve Hanke has warned.
The professor of applied economics at Johns Hopkins University also said inflation is fading fast, paving the way for the Federal Reserve to cut interest rates later this year. He shared the mixed outlook during a recent Capital.com interview.
Hanke slammed the Fed for overstimulating the economy during the first two years of the pandemic, then tightening its monetary policy too aggressively since March. The US central bank cut rates and ramped up its bond-buying to shore up growth in 2020. Since last spring, in response to surging inflation, it has hiked rates from nearly zero to almost 5% and started shrinking its balance sheet.
Elon Musk, Paul Krugman, and Jeremy Siegel are warning the Fed risks hiking rates too high and tanking the US economy. Here’s where 7 experts see danger.
Elon Musk, Paul Krugman, and Jeremy Siegel say the Fed may be going too far with its rate hikes.
Bill Gross and David Rosenberg have also warned the central bank against tanking the US economy.
Here’s what 7 experts have said about the danger of an overzealous Fed.
Elon Musk, Paul Krugman, and Jeremy Siegel have warned the Federal Reserve risks going too far in its fight against inflation, raising the prospect of a painful recession.
Bill Gross, David Rosenberg, Robert Herjavec, and Ed Yardeni have also urged the US central bank not to hike interest rates too high, given the potentially devastating impact on the economy.
Here’s a roundup of the 7 experts’ cautions to the Fed:
Elon Musk
“The Fed is raising rates more than they should,” Musk said on Tesla’s third-quarter earnings call. “But I think they’ll eventually realize that and bring it back down again.”
The Tesla CEO and Twitter owner suggested the US central bank is overly focused on lagging indicators of inflation, and not paying enough attention to what’s ahead.
“The Fed is not listening, because they’re looking at the rearview mirror instead of looking out the front windshield,” Musk said.
Paul Krugman
“I see a strong case that the Fed has already done enough,” Krugman said in a recent column. “You want to shoot ahead of a moving target, not behind it.”
The Nobel Prize-winning economist pointed to the sharp decline in trans-Pacific shipping costs, plus flagging demand for apartments, as evidence of the inflation threat waning.
He also flagged the strong dollar’s dampening effect on US exports, and higher mortgage rates squeezing consumers and making houses less affordable.
“I’d argue that these indicators tell us that the Fed has already done enough to ensure a big decline in inflation — but also, all too possibly, a recession,” Krugman said.
Jeremy Siegel
“The Fed is slamming on the brakes way too hard,” Siegel said in a recent interview.
“The pendulum has swung too far in the other direction,” the Wharton professor added, referring to US monetary policy going from too loose to overly restrictive.
“If they stay as tight as they say they will, continuing to hike rates through even the early part of next year, the risks of recession are extremely high,” Siegel said.
Bill Gross
“The US and other economies cannot stand many more rate increases,” Gross said in a recent investment outlook.
Gross argued that huge amounts of government debt, and global headwinds such as the Russia-Ukraine war, meant that if the Fed hikes rates too far, it could “slay inflation but create a global depression.”
“If Fed stops at 4.5% then mild recession,” Gross tweeted this week. “If it goes to 5% or higher then significant US and global downturn.”
David Rosenberg
“I would posit that the Fed has already done the overkill,” Rosenberg said in a recent interview.
The Rosenberg Research founder suggested Fed officials have a “once burnt, twice shy” mentality after reacting too slowly to the inflation threat, so they’re overreacting now by raising rates too aggressively.
If the Fed continues to tighten its monetary policy, it could tank house prices, spark a credit crunch in the banking sector, weaken consumer spending, and make any economic downturn last longer, Rosenberg said.
Robert Herjavec
Consumers and enterprises are still spending money, but rising interest rates will eventually stifle that demand, Herjavec said in a recent interview.
“I worry we’re going to hit a wall, and the interest rates are going to catch up to us, and the whole thing is just going to stop,” the “Shark Tank” investor and Cyderes CEO said.
Herjavec added that he’s more worried about the Fed’s “maniacal drive with interest rates” than he is about inflation.
Ed Yardeni
“I think the Fed has to be really careful here,” Yardeni said in a recent interview.
“If they keep going without pausing, it’s really going to create a real possibility of a significant recession,” he added.
The Yardeni Associates boss pointed to declining food and energy prices as evidence that inflation is on the decline. He noted the Fed’s tightening has already hammered the housing market, and fueled the stock-market’s sharp decline this year.
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“The Fed has given us the the biggest whiplash we’ve ever had in history,” Hanke said. “An explosion of the money supply, the huge inflation, and now all of a sudden the brakes have been slammed on and we’re going to have a recession.”
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Hanke, a senior fellow at the Cato Institute and a former economic adviser to President Ronald Reagan, pointed to money supply as the key driver of the American economy. Changes to the amount of cash and short-term savings first affect the prices of assets such as stocks and houses, then the level of economic activity, then the pace of price increases, he said.
Fueled by the Fed’s pandemic stimulus, the money supply’s three-month annualized growth rate hit an unprecedented 77% percent in May 2020, Hanke noted in a recent National Review column. It swung to -5.4% by December last year, meaning the US money supply shrunk year on year for the first time in decades, he said.
As a result, the pain of soaring prices has been replaced by an impending recession, he told Capital.com.
“Inflation is basically over now given this huge squeeze in the money supply,” Hanke said, adding that price growth could flatline by the end of this year. As a result, he predicted the Fed would start lowering rates by the end of this year, or even sooner if a liquidity crisis or severe recession emerges.
The veteran economist cautioned that Fed Chair Jerome Powell and his colleagues are flirting with disaster by paying so much attention to borrowing costs.
“They’re focused on interest rates, not the money supply, and that’s a very dangerous way to be flying an airplane,” he said.
Hanke also addressed the idea that bad news for the economy is good news for stocks as it raises the chances of short-term rate cuts.
“Once people start staring at the recession and see that as something that’s coming down the pike, for sure I think that will change,” he said.
“It’s going to be a tug of war,” Hanke continued. “Interest rates softening up a little bit is good for the market, but certainly a recession and earnings coming down is not good for the market.”
