Inflation has been a hot topic for quite some time now and it ultimately led the central banks like the Federal Reserve to start fighting it aggressively as it turned out to be more persistent and entrenched than the Fed expected. Without price stability an economy cannot grow, and this is why controlled inflation is a central bank’s most important goal.

In fact, such a high inflation eroded consumers’ purchasing power so much that their sentiment about the economy is the lowest on record. Consumer spending makes up for 70% of US GDP and this is why a depressed consumer is bad for the economy as a whole as they’re going to spend less and less, ultimately leading to recession.

The market now is shifting its focus to recession. “History tells us that the Fed has never accomplished a soft landing when inflation surpassed 5%” as the famous billionaire investor Stanley Druckenmiller noted recently at a conference. Besides that, many other indications point to a recession being pretty much certain. The stock market is in a bear market, the yield curve is inverted, consumers sentiment is at record low, inflation is still high, we can see big losses in commodities sensitive to global growth like copper, a very strong US Dollar, an aggressive tightening by the Fed and leading components in the PMIs in contractionary territory.

Everything says that the US may be already in a recession or heading into one soon. To bring down inflation at this point a recession is welcomed as demand will be lowered. One thing that the Fed cannot do though is pausing or even start cutting interest rates until inflation is clearly on a sustained downward path. The risk is that they will pivot too early and fail to bring inflation to their 2% target settling at a higher rate.

It may sound good if they settle at a higher rate, say 3%, but that will signal to the market that they are not serious about achieving 2% anymore and lead to other worse consequences like loss of credibility. That’s why in my opinion they will stay the course until the data shows that the disinflation will bring the rate to 2% and they can pause or start cutting interest rates.

This article was written by Giuseppe Dellamotta.