US recession risk remains as Fed seeks to tame inflation
After its latest rate rise, the Federal Reserve has signalled the pace of hikes could slow. But a recession may still be necessary to bring runaway inflation under control.
The Federal Reserve raised interest rates by another 75 basis points (bps) at its July meeting, but indicated that the pace could slow from here.
In prepared comments, chair Jerome Powell said “the labour market is extremely tight and inflation much too high”.
However, he also said that as policy tightens further, it will be appropriate to slow the pace of increases to assess how the cumulative policy adjustment is affecting the economy and inflation.
Later, in his press conference, Powell noted that policy is now neutral, a view shared by other members of the committee. There will be plenty of new information coming in on the state of the US economy before the next meeting on 21 September, but these comments suggest the Fed is more likely to move by 50 bps rather than 75 next time.
In our view, evidence of a slower economy is likely to continue to accumulate via a weaker housing market and consumer. This should feed through to a slower labour market as firms respond to weaker sales.
The challenge will be how quickly or otherwise inflation declines. Lower commodity prices and easing bottlenecks suggest we will see lower inflation in the goods sector; however, headline CPI rates could remain sticky as service sector inflation will take time to turn.
As a consequence, the risks are still skewed towards the Fed having to generate a recession to bring inflation under control.
Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.