Federal Reserve Chairman Jerome H. Powell testifies before a U.S. Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, March 7, 2023.
Kevin Lamarque| Reuters
According to Steven Blitz, chief economist at TS Lombard, the US Federal Reserve cannot disrupt the cycle of rate hikes until the country enters a recession.
“There is no way out until he (Fed Chairman Jerome Powell) triggers a recession, until unemployment rises, which is when Fed rates stop being raised,” Blitz told CNBC’s “Squawk Box Europe” on Wednesday.
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He stressed that the Fed has no clarity on the ceiling of rate hikes without such an economic slowdown.
“They have no idea where the top rate is because they have no idea where inflation settles without a recession.”
Powell told lawmakers on Tuesday that stronger-than-expected economic data from recent weeks suggests the “final interest rate level is likely to be higher than previously expected” as the central bank appears to be dragging inflation back down to earth.
The Federal Open Market Committee’s next monetary policy meeting on March 21-22 will be crucial for global stock markets, with investors watching closely whether policymakers opt for a rate hike of 25 or 50 basis points.
Market expectations for the terminal Fed funds rate were around 5.1% in December, but have risen steadily. Goldman Sachs raised its target range for closing rates 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 nearly 575 points lower 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’s going to be a recession and the Fed is going to push through and they’re going to get the unemployment rate down to at least 4.5%, I think it’s going to get to 5.5% eventually,” Blitz said. said.
He noted that there are “rumblings” of an economic slowdown in the form of layoffs in the financial and tech sectors and a stagnant housing market. Along with the weakness in the US stock market, Blitz suggested there could be an “asset crunch and the beginning of the potential for a credit crunch” in the form of banks pulling back on lending.
“Either you get a recession in the middle of the year and the top rate is 5.5% or there’s plenty of momentum, the January numbers are right and the Fed is going to go through and if it goes through I think the Fed will rise to 6 .5% on the fund price before things really start to slow down and turn around,” he said.
“So in terms of risk assets, it’s not a question of if, it’s really a matter of when, and the longer this goes on, the higher the rate should be.”
The January consumer price index rose 0.5% month-on-month as rising prices for lodging, gas and fuel took their toll on consumers, pointing to a possible reversal of the inflation slowdown seen in late 2022.
The labor market remained red hot at the start of the year, with 517,000 new jobs added in January and the unemployment rate reaching a 53-year low.
The February jobs report is due Friday from the Labor Department and the February CPI reading is scheduled for Tuesday.
In the research note announcing the hike in its final interest rate forecast, Goldman Sachs said it expects the median point in its March Summary of Economic Projections to rise 50 basis points to 5.5-5.75% whether or not the FOMC chooses for 25 or 50 basis points.
The Wall Street giant also expects data ahead of its March meeting to be “mixed but firm on the net,” with JOLTS job openings dropping by 800,000 to provide reassurance that rate hikes are working, alongside an above-consensus forecast for a wage increase of 250,000 but a slight increase of 0.3% of the average hourly wage.
Goldman also forecasts a solid 0.45% monthly increase in core CPI in February, saying the combination of likely data 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 drag on GDP growth from last year’s fiscal and monetary policy tightening is fading, not increasing, and that this means that the main risk to the economy is a premature reacceleration, not a looming recession,” said Goldman. said economists.
“Last weekend we noted that consumer spending in particular poses an upside risk to growth that, if realized, could lead the FOMC to raise more than currently expected to tighten financial conditions and lower demand growth. to maintain the potential level, so that the balance in the labor market is maintained.” track.”