Don’t expect the Fed to rescue stocks in a recession: Macquarie Economist

  • The latest Federal Reserve minutes showed policymakers expecting a “mild recession”.
  • But the US economy is likely heading for a more serious downturn, according to Macquarie’s chief economics officer.
  • The central bank still won’t rush to the rescue of stocks if that happens, David Doyle told Insider.

The United States is heading for an even worse recession than the Federal Reserve expects – but the central bank still won’t bail out stocks when it does, according to Macquarie’s top economist.

David Doyle, head of North American economics at the Australian financial services group, said in a recent interview that inflation is too high for investors to rely on the prospect of a “Fed put“, which refers to when policymakers ease monetary policy to support the economy and markets.

“For the past 10 years, the playbook has been ‘buy the dip, and the Fed will always come to the rescue if it sees economic weakness,'” he told Insider. “I’m not so sure this will be the playbook for the next six to 12 months.”

“In other words, the Fed probably isn’t as strong as it was two or three years ago, five years ago, or 10 years ago, and that’s just a consequence of inflation environment we still find ourselves in,” Doyle added.

The Fed raised interest rates from near zero to around 5% in just over a year in a bid to rein in inflation, which had hit highs in four decades earlier. cooling in recent months.

Economists have warned that its aggressive rate hikes are likely to weigh on the economy – and the central bank’s own policymakers have now acknowledged the risk of a “mild recession”according to the minutes of its last meeting in March.

Doyle said he expects the United States to suffer a slightly deeper recession than the Fed and the market are expecting. Stocks rebounded in early 2023, with the benchmark S&P500 climbed just under 6% despite several signs that the economy is beginning to weaken.

“Our view is actually that we could be facing something a little more severe than the Fed expects. We are looking for a modest recession, something like what happened in 1990 and 1991,” Doyle told Insider, referring to a period in the early 1990s when U.S. unemployment peaked at nearly 8%.

“For now, the market seems to be ignoring some of these concerns, but I’m rather skeptical that we can continue to do so until the end of the year,” he added.

Doyle is not the only strategist to have warned that the era of the “Fed put” is over.

BlackRock iShares’ Karim Chedid said in January it’s time to adapt to a new investment playbook the Fed’s tightening era should last until inflation is clearly heading towards 2%.

Learn more: There will be reckoning for investors who don’t adapt to a brand new investing playbook, says BlackRock iShares strategist

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