Issue 22 – Is the U.S. Economy Heading Towards a Recession?
A serious debate over incoming economic data and the Fed’s future interest rate decisions is brewing. On one side, some economists are warning that with unemployment below current estimates of full employment, additional rate hikes are needed to prevent a costly overshoot of inflation above the Fed’s two percent target. On the other side, economists are arguing that with inflation running below target, additional rate hikes could slow inflation further and restrain the economic expansion. Only time will tell which scenario will become reality. Nevertheless, a dispassionate discussion is warranted. The causal logic is that when the labor market gets tight and broad inflation causes cost pressures to exceed selling prices, the cost of money tends to increase faster than the return on capital, thus leading to profit reduction.