US economy headed for a hard landing

US stock market shares closed sharply down on Wednesday. The Dow Jones fell 3.57% to 31,490.07 points, the S&P 500 depreciated 4.04% to 3,923.68, and the Nasdaq slumped 4.73% to 11,418.15. The dollar got stronger: the euro fell to $1.0479 (from $1.0549 in the previous session), and sterling was quoted at $1.2346 (from $1.2481).

The above market reactions came after Federal Reserve (Fed) Chairman Jerome Powell emphasized the US central bank’s determination to contain the highest inflation in decades. Speaking at an event Tuesday night, Powell said the Fed will continue to raise interest rates until there is “clear and convincing evidence” that inflation is receding.

If necessary, the Fed would not hesitate to push rates beyond “widely understood neutral levels” to reduce inflation, Powell added. The neutral rate is the level at which policy neither stimulates nor restricts economic growth.

Desmond Lachman, a resident fellow at the American Enterprise Institute and former International Monetary Fund official, told Xinhua news agency that the economy is heading for a forced landing that will tame inflation but disrupt the stock market.

“If this (a forced landing) occurs, my expectation is that the Fed will do another policy turn by the end of the year to support the stock market with a new round of monetary policy easing,” Lachman said, which could cause stocks to soar.

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One much discussed indicator is the Cboe Volatility Index, which measures expectations of volatility over the next 30 days. The index averaged 37 at previous market lows. That number on Wednesday jumped more than 14% to just under 30. That is well above the long-term median of 17.6, but not yet at panic levels. The index shot up to 82.69 in March 2020, at the start of Covid’s liquidation, and recorded highs of 80.86 in 2008.