With inflation near a four-decade high despite the Federal Reserve raising interest rates six times this year, investment banks, executives and consumers are increasingly pessimistic about the path ahead for the U.S. economy.
JPMorgan Chase CEO Jamie Dimon said this week that “storm clouds” are on the horizon, and NYU professor Nouriel Roubini said Luck last month that even “a version of the Second Great Depression” was possible.
Despite consistent doomsday predictions, the U.S. economy added 263,000 jobs last month and the unemployment rate remained near pre-Covid lows of 3.7%.
Some argue that signs of resilience in the US labor market mean a “soft landing” is likely, where inflation is tamed without triggering a recession. But Harvard economist Jason Furman isn’t so sure.
“I think a soft landing is possible,” he told CNBC on Thursday. “I just don’t think it’s the most likely outcome for next year.”
Furman argued that it could be difficult to get inflation back to the Fed’s 2 percent target rate in 2023, even if the economy slipped into recession — because of strong wage growth.
This could lead to what the Harvard economist calls an “incomplete hard landing,” where the Fed is forced to engage in two separate rate-hiking cycles.
“It might not be one and done,” Furman said. “We may have an incomplete hard landing, where we have a bit of a recession, we have reduced inflation, but it’s coming down to about 3.5%. And then the Fed has to do another cycle of tightening to bring that inflation down even further.”
Furman, who served as chairman of the White House Council of Economic Advisers under President Obama, then argued that Fed officials will raise interest rates to between 5% and 5.25% by next year to combat inflation (for reference, the current effective interest rate federal funds is 3.83%). But he added that “a figure above six is entirely possible” if price stability proves difficult to achieve.
Furman has grown increasingly pessimistic about the outlook for the U.S. economy since June, when he said there was less than a 50 percent chance of a recession.
Last week, he explained that the latest data on wage growth showed that the US had sticky “core inflation”. Average hourly wages increased by 7.8% year-on-year in November, according to the Bureau of Labor Statistics. data shows.
“All indicators now tell a similar story,” Furman wrote on Dec. 2 Twitter thread. “All the different measures of wages are showing core inflation around 4.5%… Some reason to think that will fall, but less than I thought before.”
While a growing number of Fed critics argue that the Fed is being too aggressive with its rate hikes and risks triggering a serious recession, Furman said in an October Wall Street Journal article that the central bank “shouldn’t even think about making changes, of course. “
“Until there is tangible progress on inflation, and not just wishful thinking, the Fed should not ease,” he wrote.
And recently, due to the increase in wages, the economist has become even more steadfast in his position.
“The favorable stories about the Fed being able to ease and inflation coming down … all included a slowdown in wage growth,” he said. tweeted last week. “Less likely now.”
This story was originally featured on Fortune.com
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