“If the window is narrowing, it’s because the Federal Reserve is shutting the window,” David Kelly, chief global strategist for J.P. Morgan Asset Management, told Insider in an interview released Tuesday. “The economy is very much at risk of the Fed pushing it into recession quite unnecessarily.”

Shot at a soft landing

Hoping to tame roaring inflation by cooling the hot economy, the Federal Reserve has approved six interest rate hikes this year. The strategy may ultimately reduce prices, but it will, according to many bankers and economists, likely set off a recession next year.

Last week, the Fed approved its most recent rate hike, and signaled it’s open to more, even as inflation shows signs of receding.

“There is every reason to believe inflation is rolling over and is going to fall,” Kelly said. “Month-over-month rate of change in prices is diminishing, but more than that, some of the supply-chain issues that caused that inflation are going away.”

Kelly isn’t alone in saying inflation may already be on the wane. U.S. annual inflation may already be down to as low as 4%, Nobel Prize–winning economist Paul Krugman wrote over the weekend, citing indicators that take longer to show up in economic measurements such as slowing wage growth and declining rental prices.

Some economists maintain that a “soft landing,” whereby inflation subsides without a significant economic downturn, is possible, as the U.S. could navigate a “narrow path” to avoid a recession next year, Goldman Sachs analysts led by chief economist Jan Hatzius wrote in a note to clients on Monday. 

Hatzius put the chances of a recession next year at only 35%, as opposed to 70% of economists and nearly 100% of company CEOs. In the note, Hatzius wrote that a “very plausible non-recessionary” way forward for the economy could still play out, citing “durable” economic growth and a stabilizing job market.

But despite evidence that inflation may be plateauing, Federal Reserve Chairman Jerome Powell hasn’t signaled any shift from his efforts to slow the economy, Kelly complained. And the consequences are likely a recession.

Recession or nothing

In September, shortly after approving an interest rate hike, Powell said that it was impossible to tell “whether this process will lead to a recession or if so, how significant that recession would be.” At the same time, he added that the Fed was “committed” to solving the inflation problem, signaling a recession would be an acceptable compromise to reduce prices. And in August, Powell said he was prepared to “bring some pain” to the economy, and that weakening markets were the “unfortunate costs of reducing inflation.”

Kelly said that a recession in 2023 is now likely for three reasons, two of which are partly because of the Fed’s aggressive policy this year. 

Rising interest rates have led to the highest mortgage rates in more than 20 years, causing a housing market correction of historic proportions, Kelly said. The Fed’s stance has also contributed to the strengthening of the U.S. dollar, Kelly noted, which raises the risk of global recession and stagflation because a strong dollar pushes other currencies lower.

These two factors, combined with the end of many pandemic-era stimulus programs, are likely to tip the economy into a downturn next year, according to Kelly.

“As we go into 2023, there are three forces which are pushing the economy down,” he said.

Economists including former Treasury Secretary Larry Summers have cautioned that a severe recession might be necessary to reduce inflation, and even Kelly’s JPMorgan colleagues seem to agree. A “slightly deeper recession” may be the “price we have to pay” to finally bring inflation down, JPMorgan president Daniel Pinto said last month.