{"id":64593,"date":"2023-09-23T14:29:21","date_gmt":"2023-09-23T18:29:21","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-fed-got-inflation-wrong-thats-why-a-2024-downturn-looms-says-professor-who-pioneered-popular-recession-predictor\/"},"modified":"2023-09-23T14:29:26","modified_gmt":"2023-09-23T18:29:26","slug":"the-fed-got-inflation-wrong-thats-why-a-2024-downturn-looms-says-professor-who-pioneered-popular-recession-predictor","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=64593","title":{"rendered":"The Fed got inflation wrong. That\u2019s why a 2024 downturn looms, says professor who pioneered popular recession predictor."},"content":{"rendered":"
\n

Campbell Harvey, a Duke University finance professor, best known for developing the yield-curve recession indicator, says the Federal Reserve\u2019s reading on inflation is out of whack. And, as a result, the likelihood that the U.S. slips into a recession is increasing. <\/p>\n

The big question now is the severity of the economic downturn to come, if the central bank continues to raise interest rates. <\/p>\n

\n

On Wednesday, the Fed, which began raising rates from near zero last year, held them at a range of 5.25% to 5.5%, a 22-year high, in its effort to get inflation under control.<\/p>\n

\u201cThe [inflation gauge] that the Fed uses makes no sense whatsoever, and it\u2019s totally disconnected from market conditions,\u201d Harvey told MarketWatch in a phone interview. <\/p>\n

Boston Federal Reserve President Susan Collins said on Friday that the U.S. central bank might not be done raising interest rates and that they are likely to stay \u201chigher, and for longer, than previous projections had suggested.\u201d<\/p>\n

The Fed\u2019s measures of inflation are heavily weighted toward shelter costs, which reflect the rising price of rental and owner-occupied housing. For example, shelter inflation has been running at 7.3% over the past 12 months, and also as of the most recent consumer-price index, for August. Shelter represents around 40% of the core CPI reading. <\/p>\n

Harvey says that\u2019s a problem because shelter inflation\u2019s retreat loosely follows the broader trend lower for headline inflation but at a lag, and the Fed wouldn\u2019t be properly accounting for that lag if it decided to keep its target interest rates restrictively high. <\/p>\n

Separately, MarketWatch\u2019s economics reporter, Jeff Bartash, notes that the CPI also fails to capture the millions of Americans who locked in low mortgage rates before or during the pandemic and who are now paying less for housing than they had previously.<\/p>\n

\u201cThe Fed is \u2026 using inflation, in what I call a false narrative,\u201d Harvey said. <\/p>\n

Opinion:<\/strong> Fed\u2019s \u2018golden handcuffs\u2019: Homeowners locked into low mortgage rates don\u2019t want to sell<\/p>\n

Also see:<\/strong> U.S. mortgage rates \u2018linger\u2019 over 7%, Freddie Mac says, slowing the housing market further<\/p>\n

Harvey said that if shelter inflation were normalized at around 1% or 1.5%, overall core inflation would measure closer to 1.5% or 2%. In other words, at \u2014 or substantially below \u2014 the Fed\u2019s 2% target. <\/p>\n

Consumer prices ex-shelter were up 1.9% on a year-over-year basis in August, up from 1% in July, according to the Labor Department.<\/p>\n

The Canadian-born Duke professor says that the Fed risks driving the U.S. economy into recession because it has achieved its goal of taming inflation, which peaked at around 9% in 2022, and isn\u2019t making it clear that its rate-hike cycle is complete. <\/p>\n

\u201cNow, the higher those rates go, the worse [the recession] is,\u201d he said. <\/p>\n

Harvey pioneered the idea that an inverted yield curve is a recession indicator, with the curve\u2019s inversion depicting the yield on three-month Treasurys rising above the rate on the 10-year Treasury note
\n BX:TMUBMUSD10Y.<\/span>
\n Longer-term Treasurys typically have higher yields than shorter-term U.S. government debt, and the inversion of that relationship historically has predicted economic contractions.<\/p>\n

Harvey says that that his yield-curve-inversion model has an unblemished track record \u2014 8-out-of-8 \u2014 for predicting recessions over the past 70 years. A recent inversion of U.S. yield curves implies that a U.S. recession is still a possibility. <\/p>\n

Opinion:<\/strong> The U.S. could be in a recession and we just don\u2019t know it yet<\/p>\n

Also see: <\/strong>Are markets getting more worried about a recession? Invesco says a Fed pivot is coming.<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Campbell Harvey, a Duke University finance professor, best known for developing the yield-curve recession indicator, says the Federal Reserve\u2019s reading on inflation is out of whack. And, as a result, the likelihood that the U.S. slips into a recession is increasing. The big question now is the severity of the economic downturn to come, if […]<\/p>\n","protected":false},"author":1,"featured_media":64594,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-64593","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nThe Fed got inflation wrong. 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