[adam_arthur]

It’s fair to be skeptical of economic predictions, as yes, most end up being wrong.

But in this case the Fed is quite clearly aiming to orchestrate a spike in the unemployment rate, and pretty much all of history is pointing towards the current macro setup ending with recession.

By and large people tend to be overly optimistic that this time is different re economic cycles and monetary policy.

E.g. Wall Street analysts predicted 10% earnings growth in 2008, and ended up being -70%.

[paradox242]

Economics as a "science" is when psychology majors cosplay as mathematicians. They demonstrate all of the trappings of a science; specialist jargon, mathematical notation, journals, conferences, but have scant little to show for it. They will be the first to tell you that the economic system is too complex for any one of them to understand, and point at "markers" to which they attach a level of causal significance that would make a real mathematician blush.

They are throwing darts in the dark.

God bless them, it's a hard job and someone should probably be looking into it, but never kid yourself about what their predictions are actually capable of.

[adam_arthur]

You’re mistaken.

The principles of the economy are quite clear. If people have incentive to do something, they will. If you alter incentives, you alter behavior, everything stems from that.

The problem with making predictions is that the macro economy has billions of variables which obviously all cannot be realistically modeled. That doesn’t invalidate the validity of theory. Economic theory works just the same as physics if you were able to observe and model every value accurately. Most physics problems deal with far fewer variables and can be simulated and replicated quite easily.

In this case its easy to predict because Powell has indicated for all intents and purposes that he will create a recession. And if he wants to, he 100% has the power to do it regardless of any other variable.

[imtringued]

The economy is like a feral dog. People put too much trust in the people holding the leash. They can hold the dog down but they can't make it walk.

The goal is to motivate it but also to prevent it from running away.

[gruez]

>But in this case the Fed is quite clearly aiming to orchestrate a spike in the unemployment rate

While this might be technically true in the sense that they're trying to fight inflation by tightening monetary policy, and that has the effect of slowing economic activity and driving up unemployment, I dislike the framing because it implies that the fed wants to high unemployment as some sort of end goal, as if they have some sort of diabolical agenda to oppress workers or whatever.

[adam_arthur]

They have to spike unemployment to lower wage pressures, thats it.

The Fed has to do this because they vastly overstimulated. It was entirely avoidable if responsible policy had been pursued

The people who make it into a bleeding heart kind of issue are largely misguided, and don’t understand the distinction between real and nominal. Real wages have been declining at the fastest pace in history yet they point to nominal numbers like its some victory

[opportune]

The Fed has a dual mandate. They do not actually want to raise the unemployment rate by itself, only insofar as with the very strong unemployment rates now, it gives them leeway to potentially increase it as they address their other mandate of taming inflation. Inflation in the US, contrary to popular belief, is already almost solved. Since July the MoM inflation per the FRED CPI rate is annualized at like 4%. Once the Fed feels like they have it under control they would not want to continue raising it just to increase unemployment.

[adam_arthur]

You’re mistaken.

Rate of CPI change is declining on a MoM basis due to one time fiscal headwinds/supply normalization. The demand side has not been addressed at all, with nominal GDP growth close to 10% YoY and the tightest labor market in history along very high wage growth numbers.

If the Fed doesn’t raise unemployment before loosening policy, CPI will rebound due to the level of labor market tightness and wage growth.

It’s possible the Fed will use declining headline CPI to justify pivoting prior to rise in unemployment, but this will almost certainly turn out to be a mistake and require even higher rates a year or two out.

If the Fed pivots before actually triggering a solid softening in the economy, all assets will rally and labor market will retighten.

They made exactly this mistake many times in the 70s and 80s. The only way out at this point is to keep policy tight until a recession event kicks off