Economists say there will be no exit ramp until Fed Powell triggers a recession

Federal Reserve Chairman Jerome H. Powell testifies before the U.S. Senate Banking, Housing and Urban Affairs Committee’s Semiannual Monetary Policy Report to Congress on March 7, 2023, on Capitol Hill in Washington.

Kevin Lamarck | Reuters

The US Federal Reserve will not be able to break the cycle of interest rate hikes unless the country is in recession, said Steven Blitz, chief economist at US TS Lombard.

“Until then, it is impossible to get out of it [Fed Chair Jerome Powell] Blitz said in an interview on CNBC’s “Squawk Box Europe” on Wednesday that “unless unemployment rises and the Fed stops raising rates, it will create a recession.”

He noted that in the absence of such an economic slowdown, there is no idea that the Fed will raise interest rates.

“They don’t know where the top rate is because they don’t know where inflation will settle without a recession.”

Powell told lawmakers on Tuesday that stronger-than-expected economic data in recent weeks suggested “the final level of interest rates may be higher than previously expected” as the central bank looks to bring inflation back down to Earth.

The Federal Open Market Committee’s next monetary policy meeting on March 21 and 22 will be important for global stock markets, with investors closely watching whether policymakers choose to raise interest rates by 25 or 50 basis points.

Market expectations for the terminal Fed funds rate in December were around 5.1%, but steadily increased. Goldman Sachs raised its terminal rate target range forecast to 5.5% to 5.75% on Tuesday amid Powell’s testimony, according to CME Group data.

Bond yields rose sharply and U.S. stock markets sold off sharply after Powell’s comments, with the Dow down nearly 575 points and turning negative for 2023. The S&P 500 fell 1.53% to close below the key 4,000 mark and the Nasda Compo. lost 1.25%

“There’s going to be a recession, and the Fed is going to push the point and they’re going to get the unemployment rate to at least 4.5%, I think it could go up to 5.5%,” Blitz said. said.

He noted that there are “rumblings” of an economic slowdown in the form of layoffs in the financial and technology sectors and volatility in the housing market. Along with weakness in the US stock market, Blitz said there could be an “asset collapse and the potential for a credit crunch” in the form of bank defaults.

“Either you’re going to have a recession in the middle of the year and the top rate is 5.5%, or there’s enough momentum, the January numbers are right, and the Fed will continue to operate, and if they continue to do so, I predict the Fed will hike.” Up to 6.5% on the funds rate before things really slowed down and started to pull back,” he said.

“So when it comes to risk assets, it’s not a question of when, and the longer this thing takes, the higher the rate should be.”

The consumer price index in January rose 0.5% from the month as higher housing and gas and fuel prices hurt consumers, pointing to a possible reversal of the slowdown in inflation seen in late 2022.

517,000 jobs were added in January, bringing the unemployment rate to a 53-year low.

The February jobs report is due Friday from the Labor Department, and the February CPI is scheduled for Tuesday.

Powell's bearish commentary means a 50bps hike is possible in March, says Gradient's Jeremy Bryan

In a research note announcing the increase to its terminal rate forecast, Goldman Sachs said it expects the median point in the March round of economic forecasts to rise 50 basis points to 5.5-5.75%, regardless of whether the FOMC chooses 25 or 50. base points.

The Wall Street giant expects data ahead of the March meeting to be “mixed but solid on the line,” with JOLTS job vacancies falling by 800,000, giving confidence that rate hikes will work, and a higher consensus estimate of a 250,000 rise in wages. but a mild 0.3% increase in average hourly earnings.

Goldman also forecast a 0.45% month-on-month increase in core CPI in February, and said the combination of possible data raises the risk that “the FOMC could raise by 50 bps in March, not 25 bps.”

“In recent months, we’ve seen the lag in GDP growth from last year’s fiscal and monetary tightening weaken, not pick up, and that means the main risk for the economy is a premature re-acceleration, not an imminent recession,” Goldman said. economists said.

“Last weekend, we noted that consumer spending in particular poses a high risk to growth, which, if realized, could lead the FOMC to hike higher than currently expected to tighten fiscal conditions and keep demand growth below potential, thus maintaining labor market imbalances. track”.

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