• Posted on January 5, 2024
  • by MI2 Research

“… the Fed is the biggest risk to soft landing next year”

In an op-ed for MSNBC, the “former Federal Reserve economist” warned against the Fed keeping “interest rates too high for too long”, which would cause it to “fail at its job” and snatch defeat from the jaws of victory. Sahm argues that the economy is “on course” for a soft landing, but “Federal Reserve Chair Jay Powell is not flying the plane, despite the popular narrative” (which is a far kinder metaphor than Jay being a toddler in the back seat with a toy steering wheel). Sahm suggests that “giving the Fed credit means we could learn the wrong lesson”.

“Powell did not unload the docks in Los Angeles, take a second job, give vaccine shots or drill for oil. These people are the ones who brought inflation down in 2023. They are the ones flying the plane.” We agree with Ms Sahm: it’s hard to imagine Powell could miss all these obvious photo ops.

With some acknowledgement that the Fed helped staunch the bleeding by being “lender of last resort” by “opening 11 new lending facilities to stabilize markets at the start of the pandemic” and by stepping in “when Silicon Valley Bank failed”… “averting a widespread crisis in financial markets”, Sahm casts her lot with the “adjustment cuts” crowd, saying that with inflation “moving down fast toward the Fed’s target of 2%”, the longer the Fed waits to cut, the greater the burden on families or small businesses looking to borrow”. “If people have to pull back on spending and investment too much, we could end up in a recession.” Blast!

Larry Summers appears to now be drifting toward the soft landing camp too (as Sahm trumpeted on Twitter), shifting from suggesting that “soft landings represent the triumph of hope over experience” with the more optimistic “occasionally, hope may triumph over experience”, and “it looks better, more likely than 6 or 8 months ago”. Larry did, however, in the next breath, warn that there is still a risk that the market is overestimating the pullback in inflation and, consequently, the Fed’s room for easing. It’s hard to tell if Larry just wishes to have his cake and eat it, or if he genuinely believes this, but if the latter, the container shipping rate spike and ship rerouting certainly won’t help. Either way, Larry warns that the easing of financial conditions would “raise a lot of questions about price stability”.