Snapshot

US recession risk remains as Fed seeks to tame inflation


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.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

Contact Cazenove Charities

Achieving your charity's investment objectives takes time and thought. To find out how we can help you please contact:

James Brennan

James Brennan

Portfolio Director james.brennan@cazenovecapital.com