- The US economy is set to enter a recession by early next year, according to Steve Hanke.
- The economist pointed to a troubling trend in the money supply in an interview on YouTube this week.
- He predicted inflation will likely fall below 2% as economic activity slows.
The US hasn't dodged a recession, and the economy is slowing too quickly to nail a soft landing, according to top economist Steve Hanke.
The Johns Hopkins professor pointed to signs of slowing economic activity, with inflation having cooled from its peak of around 9% in 2022. At this rate, consumer prices are bound to cool below 3% by the end of the year, and will eventually fall below 2% as the economy contracts, Hanke predicted.
"I think things are slowing down, and they will probably slow us into a recession by the end of this year or early next year," he added in a recent interview on The Julia La Roche Show.
Hanke has been warning of such a downturn for months, making him one of the last remaining bears on Wall Street. Most forecasters say the US looks poised to avoid a recession — but the money supply, a measure of how much cash and other highly liquid assets is flowing around the economy, is dropping, Hanke said, suggesting that economic activity would slow in tandem.
M2 money supply has contracted for most of the past two years, and grew by just 0.5% year-over-year in early June, according to Fed data. That compares to early 2021, when the M2 money supply grew at 27% as pandemic stimulus juiced economic activity.
The growth rate of the money supply is also well-below the 6% growth rate Hanke estimates is on par with 2% inflation. That suggests the Fed will need to loosen up monetary policy dramatically if it plans on keeping inflation at an appropriate level, Hanke said.
"The big implication is that interest rates follow inflation rates, so interest rates will come down pretty hard," Hanke said of inflation falling below the Fed's 2% target.
Fed officials raised rates rapidly in 2022 and 2023 to rein in surging inflation. Rates are now hovering at their highest levels since 2001, a level other experts have warned could push the economy into a contraction.
Central bankers deserve an "F" grade for their monetary policy approach over the past few years, Hanke said, as officials were late to address the surge in the money supply and the consequent spike in inflation.
"It's one of the worst performances of the Federal Reserve," Hanke said. "The average guy on the street corner knows that if they goose the money supply, you're going to get inflation. And if they contract it — we've had four contractions in the history of the Fed since 1930 — and every one of those has led to a deflating economy and ultimately a recession."
Fed officials look poised to cut interest rates later this year, but the outlook on a recession still looks uncertain. The US has a 56% chance of slipping into a downturn by June 2025, according to the latest estimate from New York Fed economists.