The Fed will hit the economy and will have to cut interest rates
Financial markets are issuing a warning that the Federal Reserve’s quest to control inflation will undermine economic growth during the year and force the central bank to start cutting borrowing costs again in 2023.
Fed Chairman Jerome Powell warned on Wednesday that although the US economy is strong, “there is no guarantee” that the central bank can raise interest rates sharply to fight inflation without derail growth.
“The process is very likely to involve some pain,” he said at a European Central Bank conference in Sintra, Portugal.
Bond market traders reacted quickly. They expect the Fed to raise interest rates to a peak above 3.5% in March 2023 as it attempts to bring inflation down, according to futures prices listed by Bloomberg.
But starting Thursday, traders expect the U.S. central bank to start cutting interest rates in mid-2023 as growth slows, cutting them by around 50 basis points to around 3%. by December next year.
Only a week earlier, the market expected the Fed’s main interest rate to be around 3.2% by the end of 2023.
“The big and the good at the ECB’s Sintra conference made it clear that they are more concerned about hitting inflation on the head than anything else, which is not surprising, but it means downside growth risks will persist,” said Kit Juckes, macro strategist at Societe Generale.
The Fed’s federal funds target range is currently 1.5% to 1.75%, after the central bank made the first increase of 75 basis points since 1994 earlier in June.
In a Deutsche Bank investor survey published on Thursday, some 90% of respondents said they now expect a
before the end of 2023, compared to just 35% six months ago.
“It echoes the view of our own economists that we are going to have a recession in the second half of 2023, and just shows how sentiment has changed since the start of the year as central banks have started to hike rates. “, said Deutsche Bank strategist Jim. said Reid.
One advantage is that a recession is very likely to cool searing inflation, which is running at a A peak of 8.6% in 41 years in the USA.
Bond market investors now expect inflation to average 2.6% over the next five years, according to a measurement known as the rate of return. That’s down from 2.8% a week ago and 3.6% in March.
However, not all analysts and traders are expecting a US recession. Many point to the large savings accumulation of Americans during the pandemic and say that should cushion the blow during any downturn.
“Suggestions that a recession is imminent or inevitable are a far cry from the truth,” said Michael Pearce, senior US economist at Capital Economics.
He said business surveys show the economy is still strong and new business continues to come in. “Any recession, if it happened in the next few years, would be moderate,” he said.