The FOMC released its latest statement on monetary policy. The federal funds target rate has been hiked by another 50 basis points, while the balance sheet continues to drain slowly.
This is all in the face of an inverted yield curve, which is the best predictor of a coming recession.
You probably don’t need to be an expert in Austrian school economics to understand that there is major economic trouble ahead. Still, it doesn’t hurt to invoke the face of the Austrian school, Ludwig Von Mises.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
The Fed had a very loose monetary policy from 2008 to 2014. It looked like we were going to get a recession in 2020, but then COVID hysteria happened, which gave the Fed an excuse to more than double its balance sheet again in a short period of time. This delayed the recession.
So why doesn’t the Fed just delay the next recession too, and do the same thing again?
As Mises explained, eventually it ends up in what he called a crack-up boom. This means that there is some form of hyperinflation and the currency is destroyed.
I have long held that the Fed is not likely to engage in hyperinflation. We can get relatively high price inflation like we see now, but the Fed doesn’t want to destroy the dollar. That’s why we see the Fed tightening now.
Even if the Fed didn’t tighten, we would still eventually see a major recession. Mises pointed out that even the slowing of the rate of growth of the money supply will eventually be enough to bring on the correction in the malinvestment.
But we are in an environment where there is major malinvestment from previous Fed actions, and now the Fed is raising interest rates and draining its balance sheet, even if slowly. The yield curve is heavily inverted, yet the Fed continues to tighten.
The theme for the rest of this year and 2023 will be to live like we are in a recession. This is the best way to prepare for a recession. You should try to lower your spending, even in the face of price inflation, and you can hopefully set aside some extra money.
But the most important aspect of living like we are in a recession now is that it prepares you mentally. You will not be as disoriented when the recession does hit, and you are less likely to make a stupid mistake. It will also be less difficult for you to cut back since you have already cut back.
The recession is likely to hit hard in 2023. Maybe the worst won’t be until 2024. But unless the Fed drastically reverses course, there is a recession on the horizon. Even if the Fed does reverse course, it probably won’t be enough to stop it at this point, unless they do resort to mass inflation.
Let’s hope that the Fed doesn’t reverse course so that we get the lesser of two evils.