Steve Hanke, a professor of Applied Economics at Johns Hopkins University and former member of Ronald Reagan’s Council of Economic Advisors, has delivered a stark warning: the U.S. Federal Reserve is directionless and the economy is heading for an 'ugly' recession in 2024. In an interview with Kitco News’ Michelle Makori, Hanke accused the Fed of not knowing what it is doing and of ignoring critical monetary indicators.
Fed Blinded to Money Supply Contraction
Hanke argued that while interest rates dominate headlines, it is the money supply that deserves far more attention. He noted that Fed Chair Jerome Powell paused interest rate hikes but maintained quantitative tightening, leading to the fastest money supply contraction since the Great Depression. “Since last April, the money supply has shrunk by 4.6%,” Hanke said. “You have to go back to 1938 or 1939 to see that kind of shrinkage.” He emphasized that changes in the money supply transmit to sensitive asset prices within about six months, and to broad inflation within 12 to 24 months. “Since the money supply peaked, the economy is going to be crashing,” he stated.
Hanke criticized the Fed for using post-Keynesian macroeconomic models that exclude money, calling it “ignoring the evidence.” He repeated: “I think the Fed doesn’t know what it’s doing. Chairman Powell has repeatedly said in public that the Fed doesn’t pay any attention to the money supply.”
Recession ‘Baked in the Cake’
The economist insisted that a recession is inevitable given the monetary contraction, with a lag of six to eighteen months before full effects are felt. He also warned that banks are tightening and reducing assets to meet regulatory demands, which will further slow the economy. The only thing that could make the Fed pivot, Hanke suggested, is a credit or liquidity crisis on Wall Street. “If they have some kind of credit or liquidity crash, or squeeze on Wall Street, they might change course,” he said.
Gold Outlook and Argentina’s Inflation
Hanke expressed a positive view on gold, citing its historical performance during recessions and recent central bank buying. He also discussed how Argentina should tackle its inflation problem. Hanke’s sharp criticism of the Federal Reserve’s direction underscores a growing concern among economists that the central bank’s policy missteps could trigger a severe downturn.