Is The Economy Headed For a Soft Landing, Stagflation, or Crash?
The discussion about a target “neutral” nominal Federal Funds rate is fatuous: As long as real interest rates are negative there is no effective demand restraint emanating from monetary policy… except, perhaps, via asset prices.
And here then is the central conundrum for the Fed.
If the rise in rates and quantitative tightening is too slow, it will not constrain the inflation of goods and services prices.
On the other hand, if tightening is rapid enough to constrain demand, it might result in a collapse in a swathe of asset prices, and financial turbulence that will move from Wall Street to Main Street and elicit a sharp recession.
My bet for the present is on scenario three: stagflation. But... things could get worse.
Leslie Lipschitz Barrons 23 May 2022
Investors are actually positioned for a relatively smooth landing scenario
Bridgewater Associates’ Greg Jensen, the co-chief investment officer of the world’s biggest hedge fund, warned of a toxic brew for asset prices as the Federal Reserve raises interest rates and unwinds its balance sheet to deal with the highest inflation in decades.
Bloomberg 23 May 2020
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