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Friday, December 16, 2022

Today’s bulletin by: Jared Blickre, a reporter focused on markets at Yahoo Finance. Follow him on Twitter @SPYJared:. Read this and more market news right away Yahoo Finance app.

Forget about the soft landing in 2023.

If the Fed achieves its goal of reducing inflation, it all but guarantees a punishing recession next year, driven by a rapidly deteriorating labor market.

As Yahoo Finance’s Miles Woodland noted in a Thursday morning roundup, Fed Chair Powell strained credulity at his latest news conference as he tried to make the case for a potential soft landing next year, when inflation would ease without shrinking the economy.

Powell struggled to fit the FOMC’s own projections for the economy next year into a narrative that avoids a hard landing or recession.

Powell pointed to a strong labor market and didn’t mince words when he said: “There is an imbalance between supply and demand in the labor market,” noting that it will take “significant time” to bring the labor market back into balance.

Federal Reserve Board Chairman Jerome Powell looks on during a press conference announcing that the Federal Reserve has raised interest rates by half a percentage point at the Federal Reserve Building in Washington, U.S., December 14, 2022. REUTERS/Evelyn Hochstein

The Fed’s problem has been inflation, which is currently well above its 2% target.

In November, the total inflation estimated by the Consumer Price Index (CPI) was 7.1% compared to the previous year. In June of this year, inflation exceeded north of 9%.

Fed forecasts released on Wednesday showed inflation slowing next year as unemployment rises. But with inflation expected to reach 3.5% by the end of 2023, the Fed’s own projections suggest prices are still rising at an unacceptable rate.

And how? Alfonso “Alf” Peccatiello As The Macro Compass notes, the surest way to reduce inflation is through a recession.

Since 1960, every recession except the pandemic-induced recession of 2020 has started with inflation of 3.7% or higher. And only in 1974 did the recession end with inflation above 2.7%.

Modern economic history shows that recessions reduce inflation.  And the current Fed is more focused on achieving the latter than avoiding the former.  (Source: The Macro Compass)

Modern economic history shows that recessions reduce inflation. And the current Fed is more focused on achieving the latter than avoiding the former. (Source: The Macro Compass)

Also of concern for Powell and the Fed is that while claims of 0.5% GDP growth in 2023 offer evidence that refutes the recessionary suggestions that come from their forecasts, the outlook for the labor market is less ambiguous.

Sahm’s Rule is a relatively new Fed model that has correctly predicted the last nine recessions and executed much faster than they were officially announced in real time. Recession alarms are triggered when the unemployment rate’s three-month moving average is 0.50% above its lowest 12-month low.

The current 12-month low for unemployment is 3.5%. So, if and when the 3-month moving average rises above 4.0%, it may signal that the economy is already in recession.

Even if we mark this local low from November’s 3.7% unemployment rate and move the Sahm Rule trigger to 4.2%, the Fed’s forecast is still hairy. The Fed is forecasting an unemployment rate of 4.6% by the end of next year, so it’s easy to see where the fault lies in the central bank’s argument.

But if we take Powell’s comments and the Fed’s forecasts together, any argument against anti-recession is largely academic.

This Fed’s goal is to reduce inflation and bring it down a lot.

“Without price stability, the economy doesn’t work for anybody,” Powell said Wednesday.

And the way to that stability, read. 2% inflation, labor market.

“There will be some easing in labor market conditions,” Powell said. “And I wish there was a completely painless way to restore price stability. There is none. And this is the best we can do.”

What to watch today?

Economy

  • 9:45 a.m. ET S&P Global US Manufacturing PMIDecember preliminary (46.9 expected, last month: 46.4)

  • 9:45 a.m. ET S&P Global US Services PMIDecember preliminary (47.8 expected, last month: 47.7)

  • 9:45 a.m. ET S&P Global US Composite PMIDecember preliminary (46.5 expected, last month: 46.2)

Profit

  • Accenture (ACN), Darden Restaurants (DRI), Winnebago Industries (WGO)

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