In a riveting August 2022 CNBC interview, Steve H. Hanke, a Johns Hopkins University economics professor, made a bold prediction: “We’re going to have one whopper of a recession in 2023.” Come April 2023, he reiterated his warning, stating “We know the recession is baked in the cake.” Many other economists also foresaw a recession in 2023. They were wrong.
Most recession predictions were based on the reasonable assumption that the U.S. Federal Reserve would do whatever was necessary to bring inflation down to the central bank’s 2% target level. During the Fed’s great war on inflation that began in 1979, Fed Chair Paul Volcker was asked if the tight money policies would cause a recession. He answered immediately, “Yes, and the sooner the better.”
In another conversation in 1980, Volcker said that he wouldn’t be satisfied “until the last buzz saw is silenced” — a reference to the devastating effects of higher interest rates on the construction of homes, factories and office buildings.
In 2022, with the rate of inflation threatening to reach double-digit levels, as had been the case in 1979, Fed watchers naturally assumed that the Fed would again jack up interest rates high enough to cause a recession large enough to crush inflation. To their surprise, the Fed engineered a soft landing, bringing down the rate of inflation without causing a recession.
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