(Telegraph) Ambrose Evans-Pritchard–The US recession is here, and central banks are still fighting the last war

The US is either in recession already, or probably will be by early autumn. This has sweeping consequences for the world’s dollarised financial system, for commodity demand, and for global inflation.

The New York Federal Reserve’s internal model is flashing an 80pc risk that the US economy will enter a sustained contraction in the second half of this year, much sooner than presumed just weeks ago. The chances of a “soft landing” have dropped to 10pc. If so, you can stop worrying about an inflationary spiral.

The institution’s “dynamic stochastic general equilibrium” model (DSGE) points to an outright fall in GDP of 0.6pc this year and a further fall of 0.5pc next year. It likens the current picture to the 1990 recession under George Bush senior, triggered by the First Gulf War.

Monetarists think the DSGE model understates the danger since it entirely ignores the role of money in the economy. It treats the abrupt switch from extreme quantitative easing to extreme quantitative tightening – a $2.4 trillion reversal, annualised – as mostly background noise. This New Keynesian blind spot on how QE works (through the banking multiplier) has misled the Fed before, and may be misleading the Fed now.

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Posted in * Economics, Politics, America/U.S.A., Economy, Federal Reserve