The U.S. Federal Reserve will find it 'very hard' to engineer an economic soft landing after its cycle of aggressive interest rate hikes, according to former Reserve Bank of India Governor Raghuram Rajan.
While this approach may work if the knock-on effects are "linear" — translating a little overtightening by the Fed to a small overshoot on unemployment — he noted the risk of a cliff edge effect in labor markets.
"If people are not firing workers because they see it is very hard to hire workers — nobody's firing, it's very hard to hire workers, let me keep on my workers — once you see enough slack build up in the labor market, you say 'it's easy to find workers, let me fire the ones I had in a hurry,' and then you get a mass layoff effect," Rajan explained. "Is it linear or is it non-linear? We don't know."to 6.23% last week. They stood in a 6.
"Nobody's selling, therefore the little demand is met by little supply. What's [it] going to take [for] people to sell? Right now, they're not selling because they can't buy," Rajan said. "I have a 3% mortgage, I can't afford a house at 7% so I'm not going to sell because I can't buy.
Rajan stressed that the labor and housing market cliff edge is the "dire scenario" and that the most likely outcome was a slight U.S. recession. He refused to rule out a soft landing, which avoids two consecutive quarters of negative growth.
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