No Excuses: Plan Now for Recession

Key Points

  • A recession may already be under way. Even if not, the Fed’s actions greatly increase the risk of a recession in the months ahead.

  • The Fed’s tardiness in tackling inflation raises the probability that policy makers overreact, increasing uncertainty and the likelihood of a recession.

  • Policy makers need to deal with each of the individual sources of inflation in a coordinated fashion. Using a blunt instrument, such as a rate hike or quantitative tightening, merely crushes demand.

  • Given today’s relatively high level of uncertainty, business leaders owe it to their shareholders to engage in risk management.

Campbell Harvey is the corresponding author.

Recessions do not naturally begin in an economy with two job openings for every job seeker. That said, there’s nothing natural about recessions. In 1998, MIT economist Rudi Dornbusch observed that “none of the post-war expansions died of natural causes, they were all murdered by the Fed.” The motive for this murder is usually to save the economy from incipient inflation by killing the economy.