The Coming Recession

Last week, Kevin Warsh raised interest rates. This week comes the bad news.

Austan Goolsbee, who runs the Chicago Federal Reserve bank, told a bunch of Brits at a shindig in London that the Fed’s problem is that they don’t read El Jefe. I mean, that wasn’t his exact quote, per se, but he was implying as much when he said that the Fed is facing a persistent supply shock over which it has no control… and that the Fed now has no choice but to crush the American consumer.

Goolsbee was much more polite in his approach to that same concept. He put it this way: The only way to bring inflation down is to “raise rates and narrow the gap between supply and demand.”

Which means…

A recession is incoming.

And as Goolsbee said: “It’s going to be painful.”

That’s what El Jefe has been saying: I wrote in July that the only road back to 2% inflation would likely run through a recession. Now, the Fed has published the map.

The type of inflation berating America these days is tied to a supply shock. Trump’s tariffs, Trump’s war, Trump’s trade conflicts with any country that sneezes the wrong way.

The Fed cannot control the Strait of Hormuz. It can’t ask the Houthis “pretty please, reopen the Bab el Mandeb strait so Americans can pay $2 a gallon for gas.” It has zero sway with Ukraine bombing Russian refineries. It cannot magic up more supply of diesel… or potash American farmers need to grow crops.

Those are problems that have helped jack up inflation to 3.4%, well above the Fed’s 2% target—a target, by the way, the Fed hasn’t come close to hitting in five years.

In seasons past, the script told the Fed to wait out a supply shock, since it has no power over those. Just look through the shock and play a bit of pinochle while you await the fading of the shock.

But this particular shock isn’t going away because the Sharpie-wielding dude in the Oval Office continues with his tariffs and trade wars and bang-bang wars, all of which are screwing up supply chains all over the world.

So, Goolsbee is telling us all that forcing inflation back to 2% means purposefully collapsing employment in the US because supply shocks require “a difficult trade-off” between the Fed’s dual goals of low inflation and maximum employment.

For his part, Fed Chair Kevin Warsh says that AI will lower inflation through a productivity boost and massive infrastructure spending.

Maybe.

Then again, there’s a very good reason why the NY Times ran a guest essay under this headline back in August: “This Is How the A.I. Debt Binge Sinks the Economy.”

The point: Tech giants once built data centers with cash they’d already earned. Now the bills are so gargantuan that they’re borrowing hundreds of billions in bonds, plus trillions more hidden in long-term leases and purchase promises that never show up on a balance sheet. And every tech boom financed that way, from railroads to fiber optics to housing, has ended in a bust.

The technology survived.

But the economy got slammed. The demand shock the Fed is trying to engineer with rate hikes happens in a blink—and at vastly larger scale—when AI spending collapses.

The Fed pushing rates higher to drive down demand as the AI bubble pops is a gray swan double-whammy that would send America into a severe recession.

Just maybe that’s what awaits us in 2027?

For now, the Fed is betting that AI doesn’t do what the internet did in 2000. And it’s betting that its gentle rate hikes can peacefully bring demand back in line with supply.

Maybe the Fed’s right on both counts.

I doubt it.

Goolsbee says this is going to be painful. But he’s a central banker, so he has to be polite.

I’ll say it plainly: 2027 is the year the bill comes due.

Recession incoming.