If the Federal Reserve doesn't do this, the U.S. economy and S&P 500 will have a hard landing.

The biggest reason to be hopeful that a recession caused by the Federal Reserve can be avoided next year was just taken away. In September and October, hourly pay went up, and in November, it went up even more. This pushed wage growth far above the range that is in line with the Fed's 2% inflation target.

Nearly everyone agrees that the Fed needs to raise its inflation target, at least in practice, if the U.S. economy is to avoid a hard landing and a bigger drop for the S&P 500. The Fed might be willing to do this, but the economy would still need to cool down more before they stop raising interest rates.

"The 2% inflation target is a lot more flexible than the Fed lets on," RSM chief economist Joe Brusuelas told IBD. "I don't think there's any constituency out there for the bloodletting that would be necessary."

Brusuelas thinks that for inflation to return to 2%, the Fed would have to raise unemployment to 6.7%. But most of the way to 3% inflation could be reached with a much smaller rise in unemployment to 4.6%, which would still cost 1.7 million jobs.

"If the Fed is dead set on getting inflation to 2%, that could mean more rate hikes and a higher end rate than what is already baked into the cake," said Joe Quinlan, head of market strategy for Merrill and Bank of America Private Bank. "It might be too much tightening of the money supply," which would cause a sharp drop in the U.S. economy and earnings.

But Quinlan also thinks there is a chance of a better outcome. If inflation keeps going down toward 3% and Fed policymakers "take their time" instead of rushing things, he thinks the markets will go up.

"I wouldn't be surprised if, in maybe two years, the new Fed inflation target is something like 3% to 3.5%. That is definitely a possibility, and everyone agrees that it would be fine."