On our way to a hard economic landing
by Desmond Lachman, Opinion Contributor - 05/20/22 9:30 AM ET
Anyone who believes that the Federal Reserve will succeed in its efforts to reduce inflation without causing a hard economic landing has not been paying attention to the recent meltdown in the financial markets. Nor have they been paying attention to the dramatic increase in mortgage rates or to the rapid rise in the dollar.
Until very recently, both the stock market and the bond market boomed as seldom before on the back of ultra-low interest rates and the Fed’s $120 billion a month liquidity injection into the markets through its bond-buying activities. By the end of last year, equity valuations had reached nosebleed levels experienced only once before in the past 100 years while interest rates on risky loans were at close to historic lows.
Fast forward to this year and we have a completely different story. As the Fed has been forced to shift to a hawkish monetary policy stance to bring down multi-decade high inflation, which the Fed itself had created, the bottom has fallen out of the equity, bond and crypto currency markets.
It has done so as markets are coming to terms with the Fed’s announcement that it will now increase interest rates in 50 basis point steps rather than the more normal 25 basis point steps and that, beginning in August, it will start draining as much as $95 billion a month in liquidity from the markets by not rolling over its maturing bond holdings.
Markets are also having to get used to the idea that they can no longer expect that the Fed will ride quickly to their rescue, as they have done in the past when the going got tough. Indeed, the Fed is talking as if it welcomes some decline in the stock market.
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https://thehill.com/opinion/finance/3495576-on-our-way-to-a-hard-economic-landing/
