Hope springs eternal. Today’s stronger-than-expected GDP numbers are bound to be trumpeted by optimists that the U.S. economy can achieve a soft economic landing.
Before being carried away by that optimism, one might want to place today’s GDP numbers in the context of the two-quarters of negative economic growth that preceded it. More importantly, one might want to take note that these numbers are likely to encourage the Federal Reserve to continue with its excessively hawkish monetary policy stance. That continued hawkishness all too likely will lead to a hard economic landing.
To be sure, we must welcome today’s better-than-expected GDP number. However, if we take into account that the third quarter’s 2.6 percent GDP number was preceded by two consecutive quarters of negative economic growth, we have to conclude that the US economy has basically been flat this year. That is hardly anything to write home about particularly when all the inflation indicators are pointing to inflation still running at multi-decade highs. Nor is it anything to write home about when the underlying strength of demand seems to be fading.
A basic problem with today’s Federal Reserve is that it is very much a data driven institution that overlooks the fact that monetary policy operates with long and variable lags. This induces it to look more in the rear-view mirror than to look at what might lie ahead. Rather than wait to see the effects of its unusually rapid pace of monetary policy tightening it has already taken this year, the Powell Fed plans to keep raising interest rates at a rapid clip until it sees clear signs that inflation is abating in a meaningful manner.
When it meets next week, the Fed is likely to view today’s stronger-than-expected GDP number and still uncomfortably high inflation as yet another reason to continue raising interest rates aggressively. This is likely to induce the Fed to raise interest rates for a fourth time this year by an unusually large 75 basis points. It is also likely to cause the Fed to intimate that there will be further interest rate increases down the road. Never mind that this is the fastest pace of Fed interest rate increases in any post-war tightening cycle.
Among the reasons to fear that the Fed’s hawkishness will lead to a hard economic landing is that it has caused mortgage rates to more than double from around 3 percent at the start of the year to around 7 percent at present. That has made housing ever less affordable. If someone could afford a $400,000 home at the start of the year, they can now only afford to buy a house worth around $300,000.
Typically, US economic recessions have been led by housing market declines. Judging by the recent slew of weak housing numbers, it would seem that this time around will be no different. Not only are mortgage applications and housing starts plunging. Home builder confidence is at an all-time low and home prices have now started to decline.
Another reason to fear that the Fed’s hawkishness will lead to a hard landing is that it has caused the dollar to surge by 15 percent to a 25-year high. This is bound to deal a body blow to our export sector, encourage an import surge, and complicate an already difficult world economic outlook.
Having been asleep at the wheel in 2021 and having allowed inflation to surge to a multi-decade high, the Fed is now determined to slay the inflation dragon at all costs to restore its price stability credibility. However, in the process the Fed is likely to plunge the economy into a deep recession. That will likely lead to its failure to deliver on the high employment part of its dual price stability and high employment mandate after first having failed to deliver price stability.
In which case, the Fed should brace itself for real political heat next year.
Desmond Lachman is a senior fellow at the American Enterprise Institute. He was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

pagar
October 27, 2022 at 12:26 pm
If 3rd quarter growth is 2.6%, biden’s Fed top underling could decide to herald in a fresh interest rate hike sensing a big portion of the growth is being generated by ballooning inflation.
Biden’s economic plan is no plan and bidenomics is simply posting big amounts of money to people to sway tbeir votes.
Froike
October 27, 2022 at 1:37 pm
Really…Ya think? Food Prices have doubled, Gas is back up to 4 bucks a gallon, The Demonrats have put us another 4 Trillion or more, in debt, inflation is still going up.
Yet Bidet says, the economy is booming.
Commentar
October 27, 2022 at 10:44 pm
Putin hours ago said world faces most dangerous decade since ww2.
To be more specific, world faces most dangerous USA administration since ww2.
Biden and his gang of nincompoops have brought world to the edge of economic chaos, social chaos and possible end-of-civilized-society nuclear confrontation.
While indeed US economy could be encountering major trouble, it has the safety net of being owner of world’s reserve currency or petrodollar which protects its economy.
What about other nations. Countries like haiti, colombia, mexico, peru and even puerto rico have been severely hammered by drug violence, social unrests, natural calamities, galloping inflation as their national incomes can’t keep up with the runaway US dollar and shortages of vital necessities caused by biden’s world-level bending policies.
Result is great human suffering, endless or constant mass migration, human trafficking, and deepening poverty.
Biden is clearly the least qualified of people to hold office of chief executive, but thanks to deep state, he is there in the white house unleashing chaos while he always smiles and flashes his teeth whenever the opportunity arises.
He is iblis in the flesh. The man who voted for war on iraq and who dogbarked his way to ukraine war. What’s next. Great pacific war or war of economic supremacy or war of the mother of all wars.
The Don
October 27, 2022 at 11:43 pm
There are many problems not well thought thru.
Transition to electric where the infrastucture isn’t ready, Demos like Bernie classifying corporations as evil and undertaxed when we need corporations for goods ,taxes, and jobs.
The administration continues to business as usual with Saudi Arabia instead of reducing independence and charging Prince Mohamad with murder and extradition for trial and funding transition to democracy.
Appeasement is always proven to be the wrong approach.
Corporations are a vital part of security and taxes.
Energy independance means we can run fossil fuel, coal or nuclear as needed and supplemented with solar.
GM Buicks are made in China.
Magnaquench and delphi battery tech is sold to China.
GE sold to China. Volve, made in China. Subaru, Lafayette Ind. Honda, Greensburg Ind, BMW Tennessee.
All the sales were approved by congress.
Japanese manufacturers make profitable products in US.
Maybe Bernie and congress should look closer at the SBUs (strategic business units) of
these companies. Many times they get Rich on these sales.
Hard to believe for instance Mary Barra knew nothing about the key shutoff issue. Thats bs in a large company.
They need ceo government restrictions. Its resulted in a position to make companies look poor and make a lot of personal money on the sale.
Seen it.
And thus, congress needs change in their apparently missing business model.
The chinese will be glad to take all to employ their 1.4 billion people.
They have it figured out.
Serhio
October 28, 2022 at 12:41 am
American GDP grew only due to a sharp increase in exports from the United States. Exports accounted for 108% of the total economic growth in the third quarter. Without such a rise in export volumes, the American economy would continue to shrink.
This is caused by an increase in the volume of energy supplies to Europe, which was hooked on gas and oil from the United States. In fact, the American economy is now growing only due to the super profits that the US shale industry earns from European consumers. At least some benefit from the war in Ukraine, which was unleashed by the United States.
ATM
October 30, 2022 at 1:55 am
LOL the exports that bumped the GDP were weapons to Ukraine and LPG to the EU. If the war ends in the next few months we see a nose dive 2023. Better hope there is no peace treaty in the next few months.
KLM
October 28, 2022 at 1:03 am
These numbers seem cooked. The general consensus among economists was a -0.4% estimate just a month ago. And now is 2.6%? With elections in 2 weeks? I bet we’ll see some “revision” to 0.x% in a month, just after the elections happen…
Politicians are trying any way possible to get ahead…
Bender
October 28, 2022 at 3:43 am
Caution: Pagar, Commentar, Alex, 403NotFound, are probably paid trolls,
people that is paid to spread disinformation and divisive rethoric.
They will probably change name from time to time.