Pause, Not a Recession

The gulf between investors and economists who believe in the Easter Bunny and those who believe she's buried under the New Jersey Turnpike with Jimmy Hoffa and Elvis has seldom stretched larger than it does today. And rarely have the stakes been higher for the group that's right.

On the one hand, we have sunny investment pros who think the Federal Reserve has pulled off the miracle of the century with its two-year campaign to lift interest rates: a "soft" landing for the fast-flying U.S. economy that has blunted inflation. On the other, we have skeptics who think the Fed has recklessly pushed the economy over a cliff toward a recession and botched its all-important battle with inflation.

If the optimists are right, break out the champagne: Job growth and corporate profits will bend, but not break, over the next year. They'll just sort of pause a bit as the lagged effect of higher interest rates gains traction. Companies may try to raise prices, but they won't stick -- curbing inflation. Stocks will levitate, and there will be smiles all around.

But if the pessimists are right, higher rates and energy prices will cause unemployment to soar, corporate profits to tank and prices to spiral higher, a triple bogey of bad news. Bears foresee a return to 1970s-era "stagflation," a period of flat growth combined with inflation that would end with a full-fledged recession. Stocks will stink....