The US economy is imminently facing a ‘self-inflicted’ recession, according to the developer of the yield-curve recession indicator. Campbell Harvey said the Fed has done enough damage already with its interest-rate hikes, regardless of its next move. He wrote in a Research Affiliates note that the chance of a hard landing scenario is increasing. Loading Something is loading.
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The Federal Reserve has done enough economic damage already with its interest-rate hikes and, regardless of its next move, the US is facing an imminent ‘self-inflicted’ recession, according to yield-curve guru Campbell Harvey.
The director of research at Research Affiliates and other market commentators have criticized the Fed for dismissing the 2021-2022 inflation flare-up as temporary, only to end up raising interest rates steeply later as price pressures hit 40-year highs.
Those two negatives don’t make a positive, Harvey wrote in a research note, and he now sees a higher chance of a hard landing for the US economy, a scenario involving a sharp downturn.
“Continuing to raise rates placed the Fed in danger of overshooting – increasing rates well beyond when it should have stopped – and jeopardizing the chance to achieve a soft landing,” Harvey wrote. He criticized the central bank’s decision to raise its benchmark rate for the 10th consecutive time last month despite inflation cooling.
As the economist who first highlighted the inverted bond-yield curve as a reliable recession indicator, Harvey made the case earlier this year that even though the indicator was flashing red, the economy could’ve still avoided severe contraction.
But, the wildcard was the Fed, according to him.
“The inverted yield curve – largely the Fed’s handiwork – opened the door to two causal channels to recession,” Harvey said.
The first was the “self-fulfilling prophecy” of the curve’s successful track record as a predictor of recessions, prompting businesses to preemptively begin saving, leading to slower economic growth. The second was the “major stress that the magnitude of the inversion” was putting on the banking industry, he said.