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The Fed May Be Sending Us Into A Crash Landing

Our friend Rob Arnott, the chair of asset management firm Research Affiliates, believes “a recession may already be underway. Even if not, the Fed’s actions greatly increase the risk of a recession in the months ahead.”

Arnott quotes MIT economist Rudi Dornbusch, who in 1998 observed that “none of the post-war expansions died of natural causes, they were all murdered by the Fed.”  He says the Fed’s attempt to slow the economy by ending its era of negative real interest rates will cause a severe economic downturn.

By ignoring inflation too long the Fed now faces triggering a deep recession.“Being late to the game increases the probability that the Fed overreacts, because it didn’t act soon enough,” says Arnott. “This increases uncertainty and elevates the probability of a hard landing, which is what everybody wants to avoid. Hard landing means we go into a serious recession, like the one associated with the global financial crisis.”

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