To fight that kind of thinking, Bianco said, the Fed wants homeowners and stockholders to “think twice about paying list price.” But the Fed’s instruments are blunt, and higher interest rates could also hurt tens of millions of ordinary citizens who have the biggest chunk of their retirement savings in stocks, he said. A negative wealth effect could prompt many people to indeed think twice, not just about the list price of their purchases but about buying discretionary goods and services at all.
For his part, Powell seems convinced that the job market is running so strong that the Fed can keep tightening until it subdues inflation—and do so without causing a recession (or at least a harsh one), he said. That means the Fed could keep raising rates until inflation drops to 4%, Bianco said.
That’s where the Fed’s plans for a soft landing could run into trouble, he continued. Currently, inflation is running north of 8%, and the U.S. economy has never experienced an inflation reduction of more than 4% during an economic cycle without suffering a recession, which some economists believe looms right around the corner, he said.