With inflation at a forty-year high, broad in scope and increasingly built into expectations, the Federal Reserve (Fed) has lost the anchor of price stability. Officials there now accept that, to recover its lost goal, they will have to remove extant policy accommodation and ultimately impose restraint. The business cycle is inherently nonlinear around turning points, and even a small pickup in unemployment, well within the neighborhood of that necessary to disinflate, is typically associated with recession.
Indeed, six of the seven times in the modern era that the Fed embarked on tightening spells, the US economy entered recession. We believe this time should not be different, and we estimate there is a seven-in-ten chance the US economy turns down within four quarters. These are more forbidding odds than when we last revisited the topic because the inflation problem is evidently worse, and the Fed is showing more resolve in addressing it.