May 23, 2024

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The economist says there is no exit ramp for Powell from the Fed until it triggers a recession

The economist says there is no exit ramp for Powell from the Fed until it triggers a recession
  • Federal Reserve Chairman Jerome Powell told lawmakers on Tuesday that stronger-than-expected economic data in recent weeks indicated that “the final level of interest rates is likely to be higher than previously expected.”
  • Stephen Blitz, chief US economist at TS Lombard, points out that the Fed cannot estimate its interest rate ceiling until the economy enters a recession.
  • Goldman Sachs raised its target range for the final interest rate to 5.5-5.75% on Tuesday in light of Powell’s testimony, in line with current market rates according to CME Group data.

Federal Reserve Chairman Jerome H. Powell testifies before the US Senate Banking, Housing, and Urban Affairs Committee hearing on the “Semi-Annual Monetary Policy Report to Congress” on Capitol Hill in Washington, March 7, 2023.

Kevin Lamarck | Reuters

The US Federal Reserve cannot stall the cycle of interest rate increases until the nation enters a recession, according to Stephen Blitz, chief US economist at Lombard.

“There is no way out of this even him [Fed Chair Jerome Powell] It creates a recession,” Blitz told CNBC’s “Squawk Box Europe” on Wednesday, “until unemployment goes up, and that’s when the Fed rates will stop going up.”

He stressed that the Fed lacks clarity on the ceiling for raising interest rates in the absence of such an economic slowdown.

“They have no idea what the highest rate will be, 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 indicated that “the final level of interest rates is likely to be higher than previously expected,” as the central bank looks to drag inflation to the ground.

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The upcoming FOMC monetary policy meeting on March 21-22 will be important for global stock markets, as investors are watching closely whether policy makers choose to hike interest rates by 25 or 50 basis points.

Market expectations for the final federal funds rate were around 5.1% in December, but it has risen steadily. Goldman Sachs raised its final interest rate target range forecast to 5.5-5.75% on Tuesday in light of Powell’s testimony, in line with current market prices according to CME Group data.

Bond yields rose, and US stock markets sold off sharply on Powell’s comments, with the Dow closing down about 575 points and turning negative for 2023. The S&P 500 fell 1.53% to close below the key 4,000 threshold, and the Nasdaq Composite lost 1.25%.

“There will be a recession, the Fed will push the point and the unemployment rate will be at least 4.5%, I think it will probably be 5.5%,” Blitz said.

He noted that there is a “rumbling” of an economic slowdown in the form of layoffs in the financial and technology sectors and a halt in the housing market. Along with weakness in the US stock market, Blitz suggested that “an asset crisis and the beginnings of the potential for a credit crunch”, in the form of banks’ lending backs, may be underway.

“Either you get a recession in the middle of the year and the top rate is 5.5% or there is enough momentum, the January numbers are right, the Fed gets on, and if they keep going, I think the Fed will wake up to 6.5% on the rate before things really kick in.” in deceleration and reversal.

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“So in terms of risk assets, it’s not really a question of if and when, the longer this thing goes on, the higher the rate should be.”

The Consumer Price Index for January rose 0.5% month over month as higher prices for shelter, gas and fuel weighed on consumers, indicating a possible reversal of the slowdown in inflation seen in late 2022.

The labor market remained warm as the year began, with 517,000 jobs added in January and the unemployment rate at a 53-year low.

The February jobs report from the Labor Department is due on Friday and the February CPI reading on Tuesday.

In a research note announcing its increase to final interest rate expectations, Goldman Sachs said it expects the average point in its March Summary Economic Outlook to rise by 50 basis points to 5.5-5.75% regardless of whether the FOMC picks 25 or 50. Basis points.

The Wall Street giant also expects data ahead of the March meeting to be “mixed but flat on the grid,” with JOLTS jobs dropping by 800,000 providing reassurance that the rate hike is working, along with a higher-than-consensus forecast for a payroll increase of 250,000. But a slight uptick of 0.3% in average hourly earnings.

Goldman Sachs also forecast a steady 0.45% monthly increase in core CPI in February and said the potential data set creates “some risk that the FOMC could rise by 50 basis points in March instead of 25 basis points.”

“We have argued in recent months that the burden on GDP growth from last year’s tightening of fiscal and monetary policy is fading, not growing, and this means that the main risk to the economy is an early re-acceleration, not an imminent recession,” the economists said.

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“At the end of last week, we noted that consumer spending in particular poses an upward risk to growth, which, if materialized, could lead the FOMC to rise more than currently expected in order to tighten financial conditions and keep demand growth below potential until it remains Rebalancing the labor market is a path.