Because then what is the Fed scenario like? Mujagic: ‘Inflation will fall to the eagerly desired rate of two in 2025, unemployment will rise to something like 4.6 percent, then fall again. And in the meantime the economy will grow nicely by one and a half to two percent and the Fed can lower interest rates again in 2024 or 2025 and almost cut them in half. Telephone. Jennifer Aniston. Implausible.
Two Fed economists also think the likelihood of that Fed scenario is slim. For an inflation rate of 2 percent, unemployment has to rise to 7.5 percent and nobody will allow it. Unfortunately, the Fed has only one scenario, and that’s this fantasy world. The possibility of a so-called soft landing that the Fed is aiming for is therefore very small, Mujagic thinks.
Chaos
So what is a likely scenario for 2025? Four Spanish economists studied what happened in 17 developed countries over the past 150 years when interest rates were raised sharply. The answer: chaos ensues. “However, economists also asked the next question: Why do rate hikes lead to chaos?”
According to Mujagic, this has to do with the fact that central banks themselves kept interest rates too low for too long in an earlier stage, before the crisis. So the mistake has already been made. It even seems that if you keep interest rates too low for too long, the chance of financial instability (chaos) increases by 10 to 20%. A double. “Every major crisis in the Western world since the end of World War II has been preceded by such a period of too low interest rates.”
Correct the error? How?
So what to do then? How to fix this error? “The question is whether you can fix that mistake. You shouldn’t make the first mistake.’ But now it happened. This means that if you now try to remedy the consequences such as high inflation, you need to raise interest rates. This can cause chaos. But if you do nothing, inflation will rise and that will also cause havoc. In short, it is a choice between two evils.
And how long does it take on average from the time you start raising interest rates until the crisis hits? ‘Three years. Get ready for 2025.’