Steve Hanke, an economist and professor of Applied Economics at Johns Hopkins University, as well as a former member of Ronald Reagan’s Council of Economic Advisors, recently expressed his belief that the U.S. Federal Reserve is lacking direction and “doesn’t know what it is doing.” Hanke further predicts a bleak economic downturn in 2024, referring to it as an “ugly recession.”

Steve Hanke: ‘I Think the Fed Doesn’t Know What It’s Doing’

During a recent interview with Kitco News’ lead anchor Michelle Makori, economist Steve Hanke delved into the future of the U.S. economy and the Federal Reserve’s recent decision to halt the federal funds rate at the Federal Open Market Committee (FOMC) meeting held on Wednesday.

Hanke emphasized that while the interest rate garners significant attention, it is the monetary supply that warrants closer scrutiny. He pointed out that Federal Reserve chairman Jerome Powell acknowledged the continuation of quantitative tightening despite the pause in rate hikes.

Hanke said the money supply has been contracting since last April, and he noted that it has shrunk by 4.6%. He emphasized that one would have to go back to 1938 or 1939 to “find that kind of shrinkage.” The economist insisted that contractions and expansions in the money supply will transmit changes throughout the economy, and within about six months, there will be changes in sensitive asset prices.

He commented that if you look ahead 12 to 24 months, “you get changes in broad-based inflation so what we’ve seen here is that since the money supply peaked.” “What does that mean?” Hanke asked himself. “That means the economy is going to be crashing.” The economist emphasized that “inflation is falling very rapidly because the money supply has been contracting very rapidly.” Hanke added:

Eventually, we’re going to have the economy contracting very rapidly.

The economist said that the Fed doesn’t pay much attention to the money supply because it believes the money supply is “not a reliable indicator.” Yet Hanke insists they are “ignoring the evidence” and the “models that they have are post-Keynesian macroeconomic models that don’t include money.” Hanke wholeheartedly believes a “recession is baked in the cake given these money supply contractions.” Due to economic lag, Hanke said it could be anywhere between six to eighteen months.

“I think the Fed doesn’t know what it’s doing,” he told Makori. “Remember they have doubled down on this money supply business and chairman Powell has repeatedly said in public the Fed doesn’t pay any attention to the money supply.”

Hanke said that banks are now tightening and reducing assets to “meet the demands of the regulators.” He believes that the Fed could change its approach if there’s a “credit crunch on Wall Street.” “The only thing that could make them pivot is if they have some kind of credit or liquidity crash, or squeeze on Wall Street,” Hanke said.

The economist has long been critical of the Federal Reserve, and during the conversation with Makori, Hanke also discussed gold. He expressed a positive outlook on gold, citing its past performance during recessions. He also mentioned how central banks were purchasing lots of gold in recent times. Hanke concluded by discussing how inflation should be handled in Argentina.

What are your thoughts on Steve Hanke’s warning about an ‘ugly’ recession and his critique of the Federal Reserve’s direction? Share your insights and opinions in the comments section below.