The US recession is here, and central banks are still fighting the last war

His Bull & Bear indicator is at zero, a secular buy-signal, but one that can be double-edged at critical moments. It was zero in August 2008 before the Lehman crisis, a terrible moment to take the plunge.

Mr Hartnett said the ratio of US financial assets to GDP bottomed at a multiple of 2.8 in the early 1980s under Paul Volcker, the last time the Fed pursued a scorched-earth policy against inflation. The ratio is 6.3 today, still close to an all-time peak.

The Fed risks becoming a captive of its muscular language. “The market is watching, and the Fed has to match deeds with the words to maintain credibility,” said David Wilcox, the Fed’s former chief economist, now at the Peterson Institute and Bloomberg Economics.

The more it escalates the rhetoric, tossing red meat to hard-money Republicans soon to regain Congress, the harder it will be to do a timely U-turn before it is too late.

“The fulcrum of Fed theory is that inflation would subside, so there would be no need to crush the economy, and that there would be much less mess to clean up than markets believe. But as time goes on, it is increasingly difficult to sustain that story,” he told me.

Chairman Jay Powell is haunted by the ghost of Arthur Burns, the money-printing accomplice of the Great Inflation in the 1970s. “Jay has no intention of going down as Arthur Burns 2.0. If anything, he will go down as Volcker 2.0. He is prepared to do whatever it takes,” he said.

That, precisely, is what I fear.

The Fed got into its current difficulties by willfully refusing to look at US money supply signals. The error was to continue monetising the gargantuan Trump-Biden fiscal deficits during Covid-19 with purchases of US Treasuries, almost dollar for dollar, after a V-shaped recovery was clearly underway.

Perhaps chairman Jay Powell had no choice. The Biden White House would have been outraged had the Fed “sabotaged” its New Deal experiment. “The progressives came into office breathing fire with their wacko MMT theories (ie, debt has no cost). The Fed had to let them have their chance,” said Harvard professor Ken Rogoff.

But this experiment let loose a 40pc increase in M3 money and flooded the system with liquidity. It fueled annual inflation of 20pc in the US home price index – greater than the subprime peak – as well as the Bitcoin Ponzi scheme and algorithmic eyewash like Terra.

The Powell Fed now risks the opposite mistake. It is ignoring an accelerating contraction in real money growth: just as it did, lest we forget, before the Lehman crisis in mid-2008.

Simon Ward from Janus Henderson says his early warning indicator – the growth of real six-month M1 (annualised) – turned steeply negative in the US early this year. It is much the same picture in the UK, Europe, and the largest emerging economies, bar China.

He says the current rate of contraction of “real narrow money” in the G7 bloc has occurred just twice before over the last half century: in 1973 and 1979, both on the cusp of severe recessions. Furthermore, the rate of contraction of ‘broad’ M3-M4 money is even faster today in real terms than during those episodes.

Changes in the money supply have ‘long and variable’ lag times, and there can be rogue signals, but you ignore such sudden contractions at your peril.

Something seemed to have snapped over the spring. The US homebuilders index went into freefall and is now down 40pc this year, not surprisingly since the average 30-year fixed mortgage rate has doubled to 5.8pc since December. Lumber prices have fallen 70pc over the last three months.

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