The Fed's big miss on inflation has doomed the US to recession this year, top economist says

• The US is heading into a recession because of the Fed's misreading on inflation, Brevan Howard's top economist said.
• Monetary policy is putting downward pressure on the economy, while hiring has ground to a halt.
• "Monetary policy now is as tight as it has ever been on the precipice of a recession," Jason Cummins said on a Bloomberg podcast.

The US may have tiptoed around a recession last year, but it won't be so lucky in 2024, according to the top economist at the hedge fund Brevan Howard.

That's because monetary policy remains way too tight to nail the "Sully Sullenberger soft landing of all soft landings," Jason Cummins said in Bloomberg's "Odd Lots" podcast.

"Monetary policy now is as tight as it has ever been on the precipice of a recession," he said, barring an exception in 1984.

The central bank hiked interest rates at the fastest pace in four decades, hitching rates up from near-zero levels in March 2022 all the way to 5.25%-5.5% in July 2023.

And that's weighing down the economy, Cummins warned, pointing out that household survey data shows that the number of people moving into the labor force into a job has dropped by a record amount.

"A very careful look at the labor market now will suggest that hiring has just ground to a halt," he said. "So if it weren't for participation falling back by a huge amount, three-tenths in the last report, the unemployment rate would've gone up by three tenths to 4%."

The problem is that the Fed badly misread how long high inflation would linger, prompting it to raise rates much more aggressively than needed.

Back in June 2023, the Fed held a median forecast of 3.9% in core PCE inflation — and their estimate is expected to be off by 100 basis points, Cummins said, citing projections of 2.9% core PCE by the end of January. In December, the core inflation print notched an annual 3.2% increase.

"They've never missed in that direction by that magnitude," he added. "In 2019 when they missed by a mere 30 basis points it was enough to get a 75-basis-point mid-cycle adjustment."