- The US economy will suffer a recession that could hit stock prices, warned Steve Hanke.
- The seasoned economist sees inflation falling and the Fed cutting interest rates later this year.
- Hanke pointed to shrinking US money supply as the main reason why a recession is coming.
The US economy will slide into recession, putting stocks under pressure, warned Steve Hanke.
The Johns Hopkins University applied economics professor also said inflation was falling rapidly, paving the way for the Federal Reserve to cut interest rates later this year. He shared the mixed outlook during a recent Capital.com interview.
Hanke criticized the Fed for overstimulating the economy in the first two years of the pandemic, then tightening monetary policy too aggressively since March. The US central bank has cut rates and stepped up bond purchases to support growth in 2020. Since last spring, in response to soaring inflation, it has raised rates from near zero to near 5 % and began to reduce its balance sheet.
“The Fed gave us the biggest whiplash we’ve ever had in history,” Hanke said. “An explosion in money supply, huge inflation, and now all of a sudden the brakes have been pulled on and we’re going to have a recession.”
Hanke, a senior fellow at the Cato Institute and former economic adviser to President Ronald Reagan, named the money supply as the main driver of the US economy. Changes in the amount of cash and short-term savings first affect the prices of assets such as stocks and houses, then the level of economic activity, then the pace of price increases, he said. -he declares.
Fueled by the Fed’s pandemic stimulus, the three-month annualized growth rate of money supply hit an all-time high of 77% in May 2020, Hanke noted in a recent national review column. It fell to -5.4% in December last year, meaning the US money supply has shrunk year on year for the first time in decades, he said.
As a result, the pain of soaring prices has been replaced by a looming recession, he told Capital.com.
“Inflation is pretty much over now given this huge money supply squeeze,” Hanke said, adding that price growth could stagnate by the end of this year. As a result, he predicted that the Fed would start cutting rates by the end of this year, or even sooner if a liquidity crunch or severe recession emerges.
The veteran economist warned that Fed Chairman Jerome Powell and his colleagues are flirting with disaster by paying so much attention to borrowing costs.
“They’re focusing on interest rates, not money supply, and that’s a very dangerous way to fly a plane,” he said.
Hanke also touched on the idea that bad news for the economy is good news for equities, as it increases short-term rate cut risks.
“Once people start looking at the recession and seeing it as something that’s happening, I think that’s going to change,” he said.
“It’s going to be an arm wrestle,” Hanke continued. “A slight drop in interest rates is good for the market, but a recession and lower earnings are definitely not good for the market.”