Unless the Federal Reserve does this, the US economy and the S&P 500 will crash.

The main reason for confidence that a Fed-induced recession can be avoided next year has just been revised away. Wage growth has risen far above the range consistent with the Fed's 2% inflation target, thanks to upward revisions to hourly pay in September and October, and an even larger surge in November.

The only way for the US economy to avoid a harsh landing and a further collapse in the S&P 500 is for the Fed to boost its inflation objective — at least in practice. The Fed may be willing to do so, but it will need to witness further cooling before it can stop raising interest rates.

According to RSM senior economist Joe Brusuelas, the 2% inflation target "is a lot more elastic than the Fed is letting on, because I don't think there's any constituency out there for the bloodletting that would be necessary" to achieve it.

According to Brusuelas, the Fed would have to raise unemployment to 6.7% in order to restore 2% inflation. However, getting most of the way there — to 3% inflation — could be accomplished with a considerably smaller increase to 4.6% unemployment, resulting in the loss of 1.7 million jobs.

"If the Fed is hellbent on achieving 2% inflation, it may necessitate additional rate hikes and a higher terminal rate than is already baked into the cake," said Joe Quinlan, head of market strategy for Merrill Lynch and Bank of America Private Bank. "It might be an overdose of monetary tightening," causing a deep economic and wage crisis in the United States.

Quinlan, on the other hand, sees the possibility of a more positive conclusion. He expects markets to rise if inflation continues to fall toward 3% and Fed members "take their time" rather than pressing the issue.

"I wouldn't be surprised if the new Fed inflation target is something like 3% to 3.5% in two years. That is obviously a possibility, and it is certainly acceptable to all parties."