JPM: The new Fed will bring on a “hard landing”

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JPM with the note:

Just under a year ago, theFedcompleted its framework re-view and officially changed its monetary policy strategy to a flexible average inflation targeting (FAIT) approach. With the acceleration in inflation since then, PCE inflation now averages 2.0% over the past three years. Incoming months aver-age inflation over this three-year lookback period is likely to move even higher. Did the Fed zig just as the economy was zagging? No. The framework review was motivated by the challenges that very low real interest rates present to central bankers. This hasn’t gone away; recently forward real interest rates five-to-10-years ahead returned to negative territory(Figure 1). The specter of the zero lower bound continues to haunt the world’s advanced economies.

The persistence of low real interest rates justifies the Fed’sembrace of FAIT, in our opinion. However, challenges loom further out in the business cycle—challenges that may have been caused or compounded by FAIT. The commitment to overshoot the inflation target(in more than a transitory manner)may require the Fed to push the unemployment rate below its sustainable minimum. The rest of this note discusses whythis raises the risks that the cycle ends with a hard landing. In particular, we examine certain historical properties of the behavior of the unemployment rate. Among those properties is a tendency for the unemployment rate to either move up a lot, or not move up at all. Moreover, when it moves up a lot it also moves up quickly.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.