On Wednesday the Fed delivered its biggest interest-rate hike in almost three decades, as it takes the fight against inflation into overdrive. When central bankers try this hard to slow the economy down, they often end up tipping it into outright reverse.
Investors are rushing to bet on that kind of bad outcome, sending stocks and bonds plunging. American households, watching their retirement funds dwindle as their grocery and utility bills soar, say they feel gloomier about the economy than at any time in more than four decades.
All of this is happening at a time when US consumers are still flush with cash and jobless rates are near historic lows. Fed Chair Jerome Powell said Wednesday there’s “no sign” of a broader slowdown. The Fed’s own projections, and others highlighted by the administration, suggest a recession remains unlikely, showing how different economic models can produce a wide range of outcomes.
Inflation unexpectedly spiked higher — triggering another leg of the stock-market rout, and pushing the Fed into an even more hawkish stance. And sentiment among US consumers (also known as voters) plunged to the lowest level in records going back to 1978, a period that encompasses three of the worst slumps in American history.
The mood has turned sour at an alarming pace — putting Biden at risk of joining an unenvied club. From Jimmy Carter to George H.W. Bush to Donald Trump, one-term US presidents of the past half-century all had their re-election hopes fatally injured by the lingering effects of a recession.
Rising prices are already primed to be this year’s top election issue. Sparked by the pandemic supply-chain crunch and massive fiscal stimulus, and given new impetus by the energy shock that followed Russia’s invasion of Ukraine, inflation has reached levels that most Americans haven’t seen in their lifetimes.
Add up the inflation and unemployment rates and you get a measure that economists call the Misery Index. That gauge is now elevated by historical standards — higher, in fact, than it was in several post-World War II recessions.
