Federal Reserve Chairman Jerome H. Powell testifies before a U.S. Senate Banking, Housing, and Urban Affairs Committee hearing on “The Semi-Annual Report on Monetary Policy to Congress” on Capitol Hill in Washington, March 7. 2023.
Kevin Lamarque | Reuters
THE US Federal Reserve cannot disrupt its cycle of increasing interest rates until the country enters a recession, according to TS Lombard’s chief US economist, Steven Blitz.
“There is no way out of this until it [Fed Chair Jerome Powell] creates a recession, until unemployment rises, and that’s when Fed rates will stop raising,” Blitz told CNBC’s “Squawk Box Europe” on Wednesday.
He pointed out that the Fed lacks clarity on the ceiling for interest rate hikes in the absence of such an economic slowdown.
“They have no idea where the highest rate is, because they have no idea where inflation sets in without a recession.”
Powell told lawmakers Tuesday that stronger-than-expected economic data in recent weeks suggests “the ultimate level of interest rates is likely to be higher than expected,” as the central bank seeks to bring inflation back to earth.
The Federal Open Market Committee’s upcoming monetary policy meeting on March 21-22 will be crucial for global equity markets, with investors watching closely whether policymakers opt for a 25 or 50 basis point interest rate hike.
Market expectations for the final federal funds rate were around 5.1% in December, but have risen steadily. Goldman Sachs raised its terminal rate target range to 5.5-5.75% on Tuesday in light of Powell’s testimony, in line with current market prices according to data from CME Group.
Bond yields soared and US stock markets sold off sharply following Powell’s comments, with the Dow closing nearly 575 points lower and turning negative for 2023. S&P500 slipped 1.53% to close below the key 4,000 level, and the Nasdaq Compound 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%, in my view it’s probably going to end up at 5.5%,” Blitz said.
He noted that there are “rumblings” of an economic slowdown in the form of layoffs in the finance and tech sectors and a stalled housing market. Along with US stock market weakness, Blitz suggested that an “asset crunch and the beginning of the potential for a credit crunch,” in the form of banks pulling back on loans, could be underway.
“Either you get a mid-year recession and the peak rate is 5.5%, or there’s enough momentum, the January numbers are okay, and the Fed keeps going and if it keeps going, I guess the Fed is going to rise to 6.5% on the funds rate before things really start to slow down and reverse,” he said.
“So in terms of risky assets, it’s not a question of if, it’s really a question of when, and the longer it goes on, the higher the rate needs to go up.”
THE January consumer price index rose 0.5% m/m as rising housing, gasoline and fuel prices have taken their toll on consumers, indicating a potential reversal from the slowdown in inflation seen at the end of 2022.
THE the labor market remained hot to start the yearwith 517,000 jobs added in January and the unemployment rate hitting a 53-year low.
The February jobs report is due from the Labor Department on Friday and the February CPI reading is scheduled for Tuesday.
In the research note announcing its terminal rate forecast increase, Goldman Sachs said it expects the midpoint in the March economic projection summary to rise 50 basis points to 5.5-5. .75%, whether the FOMC opts for 25 or 50 basis points.
The Wall Street giant also expects data ahead of the March meeting to be “mixed but firm on the net”, with JOLTS job openings down 800,000 to reassure rate hikes are working, alongside a better-than-consensus forecast for a payroll gain of 250,000 but a slight 0.3% rise in average hourly earnings.
Goldman also forecast a firm monthly increase of 0.45% in core CPI in February, and said the likely data mix creates “some risk that the FOMC could rise 50 basis points in March instead of 25 basis points”.
“In recent months, we have argued that the slowdown in GDP growth due to last year’s fiscal and monetary policy tightening is fading rather than increasing, and that this means that the main risk to the he economy is a premature reacceleration, not an impending recession,” Goldman said. say economists.
“Last weekend, we noted that consumer spending in particular was an upside risk to growth that, if realized, could lead the FOMC to rise more than currently expected to tighten financial conditions. and to keep demand growth below potential so that labor market rebalancing continues.” track.”