The stock market has begun the year with a strong rally, erasing the concerns that dominated investors’ minds over the previous year: inflation, a raging war, a cold war, sky-high interest rates, and a recession.
However, the elite of the investment world warns that this complacency will make the coming downturn more cruel. The surprise is that inflation is about to reaccelerate, and the Fed will have to respond by doing much more. At that point, we may end up suffering a hard landing.
Rapid US economic growth complicates the task of ending inflation. It means the Fed has to keep raising interest rates, which creates volatility and uncertainty in the markets. It means recession remains one of many scenarios on the table.
Apollo Global Management chief economist Torsten Slok has begun telling clients that the strength of the economy and still-high inflation mean the US could be headed for a third option: a no-landing scenario. In a no-landing scenario, the strength of the economy and the strength of consumption prevent supply and demand from fully adjusting, increasing the risk of inflationary bouts and keeping the consumer price index above the 2% target for an extended period. As a result, the Federal Reserve will have to continue to raise interest rates, which will make liquidity more difficult for businesses and investors.
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