Inflation
has been a hot topic for quite some time now and it ultimately led the central
banks like the Federal Reserve to start fighting it aggressively as it turned
out to be more persistent and entrenched than the Fed expected. Without price
stability an economy cannot grow, and this is why controlled inflation is a
central bank’s most important goal.

In fact,
such a high inflation eroded consumers’ purchasing power so much that their
sentiment about the economy is the lowest on record. Consumer spending makes up
for 70% of US GDP and this is why a depressed consumer is bad for the economy
as a whole as they’re going to spend less and less, ultimately leading to
recession.

The market
now is shifting its focus to recession. “History tells us that the Fed has
never accomplished a soft landing when inflation surpassed 5%” as the famous
billionaire investor Stanley Druckenmiller noted recently at a conference.
Besides that, many other indications point to a recession being pretty much
certain. The stock market is in a bear market, the yield curve is inverted, consumers
sentiment is at record low, inflation is still high, we can see big losses in
commodities sensitive to global growth like copper, a very strong US Dollar, an
aggressive tightening by the Fed and leading components in the PMIs in
contractionary territory.

Everything
says that the US may be already in a recession or heading into one soon. To
bring down inflation at this point a recession is welcomed as demand will be
lowered. One thing that the Fed cannot do though is pausing or even start
cutting interest rates until inflation is clearly on a sustained downward path.
The risk is that they will pivot too early and fail to bring inflation to their
2% target settling at a higher rate.

It may sound
good if they settle at a higher rate, say 3%, but that will signal to the
market that they are not serious about achieving 2% anymore and lead to other
worse consequences like loss of credibility. That’s why in my opinion they will
stay the course until the data shows that the disinflation will bring the rate to
2% and they can pause or start cutting interest rates.

This article
was written by Giuseppe Dellamotta.

This article was written by ForexLive at www.forexlive.com.