The US economy may witness a hard landing

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The US economy may witness a hard landing

The photo taken on June 22, 2022 shows the US Federal ReserveFederal Reserve building in Washington, DC, the United States. A bunch of US tech companies that have led the tech stocks boom over the past 10 years are announcing workforce cuts. About 4,400 contract workers were laid off on Monday, while Meta originally Facebook Inc is laying off more than 11,000 employees, about 13 percent of the total.

Since March, the US Federal ReserveFederal Reserve has aggressively hiked interest rates in order to control inflation that hit a 40 year high recently. The consumer price index increased by 0.4 percent month-on-month in October and 7.7 percent year-on-year, both lower than estimates, according to the US Labor Department on Thursday. Inflation in the United States is still high. The Fed wants inflation growth to be below 0.2 percent a month. In that case, it would be impossible for the Fed to keep inflation growth below 2 percent in the long run.

The Fed has to raise interest rates in order to control inflation, which could cause the market bubble to burst.

Nasdaq has dropped from 16,000 points to nearly 10,000 points this year due to the radical interest rate hikes and the rapid decline in the growth of broad money supply. The Fed has tightened interest rates so far, which has squeezed out of tech stocks' valuation bubble.

The risk of a hard landing for the US economy could be increased because of the hike in interest rates. The recent large-scale layoffs announced by tech companies indicate that the economic outlook has deteriorated, prompting companies to reduce labor costs and overcome innovation bottlenecks. Since the outbreak of the COVID-19 pandemic, the All-Transactions House Price Index in the US has risen sharply. In the second quarter of 2020, it was 454.7, increasing to 617.9 in the second quarter of this year. The average monthly housing inventory was only 44.2 percent of that before the COVID-19 outbreak. In the US, inadequate supply has pushed up housing prices.

The rising housing prices will lead to rising rents, which may manifest in one to one and a half years. Rents could go up in the next few months and decline only in the middle of next year. As the US economy declines, unemployment rises, income and demand falls, and housing prices fall.

It remains to be seen whether or not the bubble will burst. The financial leverage of residents has remained relatively stable due to the real estate market demand in the US. Since the high-leverage of housing units in the financial market is much less than before the 2008-09 mortgage crisis, the possibility of another systemic crisis is not high.

If the Fed continues to raise interest rates to control inflation and the US economy suffers a hard landing, the valuation of all financial assets will undergo further adjustment and the possibility of systemic risks will increase.

The Fed is faced with a trade-off: slowing rate hikes in the future, reducing the risk of a hard landing and enduring relatively high inflation for a long period of time, or creating systemic financial risks in financial markets by overly aggressive tightening.

The author is a vice-dean of the School of Economics and a research fellow at the National Academy of Development and Strategy, Renmin University of China.