The Fed’s path to a soft landing of the economy is a ‘fanciful magic carpet ride’ as its inflation fight is a lose-lose scenario, research firm says

Jerome Powell
Federal Reserve Board Chair Jerome Powell.

  • The Fed’s goals of bringing down prices while avoiding a recession is a “fanciful magic carpet ride,” Ned Davis Research warned.
  • The research firm pointed to the Fed’s delicate balancing act between those goals, calling it a “lose-lose scenario.”
  • Even if the Fed drives the economy into a recession, inflation could easily rebound if demand rises, it warned.

The Federal Reserve’s path to steering the economy to a soft landing is looking more unlikely as its inflation fight is growing bleak, according to a Ned Davis Research note titled “The Fed’s fanciful magic carpet ride.”

The note pointed to the central bank’s delicate balancing act between bringing down high prices and avoiding a recession, warning that it was increasingly a “lose-lose scenario.”

If Fed chief Jerome Powell pivots from rate hikes too early, inflation expectations could become entrenched in the economy, which would affect companies’ decision-making and potentially lead to higher unemployment. But pressing forward with rate hikes could overtighten the economy, leading to a recession of “unknown magnitude and duration,” NDR said on Tuesday.

“As Powell noted during his press conference, the soft-landing strip is narrower. The Fed’s magic carpet ride to a soft landing relies on the spontaneous combustion of job openings without many workers getting fired and inflation easing back toward target,” the research firm said. 

And even if the Fed brings inflation down to its 2% target, it could easily rebound, as supply-chain issues in the economy could reappear, NDR added.

The Fed has already hiked rates by 375 basis points this year in its scramble to put out the inflation fire. Some experts have urged the central bank to pause it on aggressive rate hikes, but at a recent press conference, Powell pointed to the still-hot labor market as one of the reasons why he didn’t see a “case for real softening just yet.” That prompted some investors to price in another 75-basis-point rate hike in December amid

Meanwhile, recession fears are growing on Wall Street: JPMorgan’s chief global strategist David Kelly told Insider the US could easily see a recession in 2023, and “Dr. Doom” economist Nouriel Roubini sounded the alarm for a painful recession ahead.

Read the original article on Business Insider