US Unlikely to Avoid Severe Recession if Fed Hikes Interest Rates Too Quickly to Cool Inflation

WASHINGTON (Sputnik) - A severe US recession might be unavoidable if the Federal Reserve hikes interest rates too quickly in its bid to cool demand and tame record high inflation, economic analysts told Sputnik.

A key Federal Reserve model this week signaled the US economic recession is already here, after projecting the second consecutive quarter of negative growth. The unofficial forecast generated by the Atlanta Federal Reserve’s GDPNow model on Thursday put 2Q GDP growth at -1%, which comes after a first quarter that saw -1.6% growth.

The central bank has said it will continue with rate hikes until inflation, running at 40-year highs of more than 8% per year, returns to its target of 2% per year. On Friday, Federal Reserve Bank of San Francisco President Mary Daly said US interest rates need to double by year-end for the central bank to have a fair shot at neutralizing inflation.

Fed Chairman Jerome Powell earlier this week said, although possible, it would be challenging for the US economy to achieve a "soft landing" - that is, avoiding a recession in the wake of the central bank’s rate adjustments.

"We won't be able to avoid a 'hard landing' with a serious recession… [and] the quicker we try to cool down inflation to the 2% target, the more likely the recession will be severe," retired Brown University Assistant Professor of Economics Barry Friedman told Sputnik.

Friedman said there was a risk in aggressively attempting to get beyond stagflation (a combination of weak growth and high inflation).

"They may hate stagflation, but a sudden sharp recession is an awful risk of a snowballing movement that takes difficult political compromises to turn around, and who is going to compromise these days?" Friedman said.

All Signs Flashing

Some experts believe the situation is even worse than the stagflation of the 1970s and early 1980s, when inflation peaked at 13.5% and then-Fed chair Paul Volcker raised interest rates to over 20%, which triggered a 16-month recession.

"Contrary to the major media talking about stagflation it will be dragflation," Trends Journal Publisher Gerald Celente told Sputnik. "Economies won't stagnate as inflation rises: It will be declining gross domestic products and rising inflation."

Levy Economics Institute of Bard College Research Associate Marshall Auerback said all signs clearly indicated that an economic decline was inevitable.

"I would argue that we're already in recession, and it will get worse," Auerback told Sputnik. "Consumer confidence is hitting record lows even below what we had in the early 1980s during the era of Volcker's interest rate hikes."

He also noted that a Bloomberg Agricultural Spot Index fell 12% in June while almost all other major industrial commodity prices such as steel and fertilizers have fallen.

"What is striking is how across the board these price declines are. Almost no commodity prices have risen since interim peaks in May or June," he said.

Auerback also pointed to the decline in the US Conference Board Consumer Confidence Index, which fell again in June, the second month in a row. Expectations, he added, have fallen into a zone associated with recessions in the past.

Retail sales too were now already plunging across the United States and Europe, Auerback observed.

"This rapid inventory build coupled with widespread business concerns about excessive inventories for several months now suggests this build in inventories has been involuntary," Auerback said. "In other words, firms have experienced an unexpected shortfall in consumer purchases."