Top line
With the Federal Reserve embarking on its most aggressive hardening campaign in nearly three decades, Bank of America economists warned customers on Friday that the central bank’s anti-inflation measures will increasingly risk a recession. next year, joining a wave of experts expressing concerns about the implications. of higher interest rates, which help fight inflation at the expense of economic growth.
Fed Chairman Jerome Powell said during his inaugural hearing before the Senate bench, … [+] Housing and Urban Affairs Commission.
ASSOCIATED PRESS
Key factors
“Our worst fears about the Fed have been confirmed,” Bank of America-led economists Ethan Harris wrote in a note on Friday, warning that officials “are playing a dangerous game of catching up.” “after instituting a 75 basis point rate hike on Wednesday. , the oldest in 28 years.
Although inflation has risen at the fastest pace in about four decades since November, the Fed only began raising rates in March, with the risk of a “boom and fall” for the economy, says Harris .
Analysts say the most likely forecast is now “very weak” growth, as the delayed impact of more restrictive financial conditions cools the economy, with persistently high inflation hovering around 3%, in compared to the historical standard of 2%, and the gross domestic rate. -Product profits are almost zero in the second half of next year.
As a result of declining consumption, Bank of America cut its growth outlook for this year to 1.5% this quarter from 2.5% and said there is a 40% chance that a Recession, characterized by two consecutive quarters of negative GDP growth, will begin next year. —More than the 33% probability that economists published at the end of last month.
On the bright side, Harris said any recession is likely to be mild as it is easier for the Fed to handle a sharp slowdown if Fed policy is causing weakness, a sentiment shared by Morgan Stanley CEO James Gorman , earlier this week, when he warned. of a “bumpy walk” for investors and place the odds of a recession at 50%.
Others are more optimistic: in a recent note, LPL financial analysts said the odds of a recession are likely to be closer to 33%, if not lower, given that corporate earnings are healthy and are inflationary pressures are likely to ease, even if the “process of getting there is not easy for the markets.”
Crucial quote
“Strangely enough, the year so far has been a painful return to normalcy … The Fed is no longer willing to go into default to support growth or equity prices,” David said. Donabedian, director of CIBC Private Wealth US $ 98 billion. , said Friday in comments sent by email. “By raising the rate by 75 basis points, the Fed has indicated that it is willing to accept a recession to control inflation.”
Lead critic
“We don’t think the Fed can stop the supply-side issues that are causing inflation without absolutely destroying the economy, but at this point, they seem resigned to what needs to be done,” says Brett. Ewing. , chief market strategist at First Franklin Financial Services, noted that the Fed’s decision on Wednesday marked the first rate hike during a bear market.
Key background
Withdrawal of pandemic stimulus measures by the Fed has hit stocks hard this year and sparked growing fears of a recession. Uncertainty has peaked in recent weeks, with all major stock market indices falling in bearish territory on Monday and a wave of layoffs that has affected several technology and real estate companies in recent boom. To make matters worse, the US economy fell sharply by 1.4% last quarter. “The risks of recession are high, uncomfortably high, and growing,” Mark Zandi, chief economist at Moody’s Analytics, said in a recent note. “So that the economy can navigate without a recession, we need a very skilled Fed policy and a little bit of luck.”
Big Number
8.6%. Thus, consumer prices rose rapidly in the 12 months ending in May, returning unexpectedly to their highest level since 1981.
To read more
Most CEOs expect recession next year, poll says (Forbes)
Student Loans, Mortgages, Credit Cards – This Will Cost the Most As the Fed Rises Interest Rates (Forbes)
Fed authorizes biggest interest rate hike in 28 years (Forbes)
This is how the markets reacted the last time the Fed raised interest rates by 75 basis points (Forbes)