Biden’s New Inflation Numbers Suggest a Hard Landing Is Coming

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Inflation has risen steadily to record highs over the last 18 months. In June, consumer prices jumped over 9% from the year before. While gas prices have dropped over the last few months, they’re still much higher than a year ago. Virtually everything else one buys, from groceries to used cars to utilities, continues to rise in price. On Tuesday, September 13, the US Bureau of Labor Statistics (BLS) reported that inflation rose 0.1% in August to 8.3% year on year. Economists predicted it would fall to 8%.

Over the last year, President Joe Biden and Federal Reserve Chairman Jerome Powell stressed they would try to help the economy recover quickly and experience a soft landing. Instead, a recession could be looming, and some economists predict an increased chance of a hard economic landing. The Fed might need to take drastic measures to slow consumer spending and the economy, and the results could be painful.

What Is a Hard Landing?

A hard landing in terms of economics is defined by Investopedia as what happens when “high-flying economies…run into a sudden, sharp check on their growth, such as a monetary policy intervention meant to curb inflation.” It goes on to say, “Economies that experience a hard landing often slip into a stagnant period or even recession.” The Federal Reserve increasing its rate is an example of a monetary policy intervention.

The Federal Reserve Likely To Take Drastic Measures To Cool Inflation

The Federal Reserve has set 2% as its goal for economic growth. With prices rising over 8% each month, economists suggest inflation is unlikely to abate anytime soon. Typically, the Fed raises interest rates and shrinks the federal balance sheet, or money supply, to quell inflation.

Raising rates comes with its own set of challenges. It causes credit card interest rates to increase, making them more expensive to use. Home loan rates also increase, making houses more expensive to buy. It could significantly affect retirement savings for those invested in 401(k)s. When the Fed gathers on September 20, experts expect the central bank to raise interest rates by 75 basis points. That could cause a crushing economic blow and slip the US into a recession.

On September 13, news of the inflation increase caused financial markets to encounter the most significant one-day percentage drop since June 2020. The S&P 500 saw a nearly trillion-dollar drop in one day. Equity and bond markets have lost around 20% of their value since January, causing $12 trillion to erase from the Gross Domestic Product (GDP), accounting for a 50% loss in household wealth.

Will the US Experience a Hard Landing?

Under a soft landing scenario, the economy might experience some turbulence but ultimately few consequences. The sector hurt the most by a hard landing would be housing, causing challenges for lower and middle-class Americans.

By increasing interest rates, the Fed is making it more expensive to purchase items using credit and de-incentivizing consumer demand. Mortgage rates are currently around 6%, the highest level since 2009. That’s an increase of 3% from January. Mortgage applications recently dropped 20% as interest rate increases pushed many homebuyers out of the market. As demand drops, so do prices. That would likely cause a cascading ripple effect throughout the economy.

Mortgages aren’t the only thing hitting Americans hard. Rents are also rising and unlikely to slow down anytime soon. In August, rent growth increased at the fastest rate since the mid-80s.

The bottom line is, if the Federal Reserve times its moves right and drops interest rates as needed, it could spare the country from an unnecessary painful experience. If not, a hard landing could land us in a recession.

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