Fed Sees a ‘Soft Landing’ for U.S. Economy. This Top Economist Strongly Disagrees

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A shopper walks through a grocery store in Washington.

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What do the Federal Reserve, Janet Yellen, and Joe Biden have in common?

A persistent belief that the Fed can maneuver the U.S. economy to a soft landing and avoid a drawn-out recession.

Top economist Bill Dudley, former president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee, disagrees.

“A recession is inevitable within the next 12 to 18 months,” Dudley wrote in a Bloomberg opinion piece on Wednesday. 

For one, Dudley wrote, persistent inflation will force the Fed to prioritize bringing prices down, even if that comes at the cost of maintaining the current low unemployment rate. The Fed’s focus on price stability “will be relentless” to avoid repeating the mistakes of the late 1960s and 1970s, “whatever the cost in terms of jobs and growth,” he added.

When the recession hits, it’s likely to be abrupt, Dudley added. In the short term, the economic strength fueled by post-pandemic pent-up demand will continue to buoy spending, softening the blow. But eventually, personal savings will run out, wage growth could stagnate, and tighter financial conditions will slow demand, he wrote.

“Economic history points to a hard landing,” according to Dudley. “The Fedhas never tightened enough to push up the unemployment rate by0.5 percentage point or more without triggering a recession.”

Last week, the Fed announced its biggest interest rate hike since 1994, raising rates by 0.75 percentage point to a range of 1.5% to 1.75%.

Dudley’s not the only one be sounding alarm bells about a recession. Some 44% of economists surveyed by The Wall Street Journal now expect a downturn in the next year. Goldman Sachs economists increased their recession-risk forecast to 30% on Monday, while Bank of America economists believe there’s a 40% chance of a recession starting next year. Citigroup estimated Wednesday that the chances of a global recession were nearing 50%.

Soft or hard landing aside, it’s going to be a bumpy ride in the interim.

Write to Sabrina Escobar at sabrina.escobar@barrons.com