Because recession fears will limit the Fed tightening

What the Fed will do. The comment by Paolo Zanghieri, senior economist of Generali Investments

The Fed's aggressive reaction to high inflation is reinforcing concerns about the outlook for the US economy. The job market is in very good shape, with the unemployment rate (3.6%) almost back to pre-COVID lows and corporate profits are solid. However, deteriorating confidence indicators signal growing fears of a recession. These fears are also reinforced by the flattening and partial reversal of the yield curve, which however steepened slightly last week.

In fact, past experience shows that a rapid and sustained rate hike could limit the chances of a "soft landing". This is compounded by lower fiscal stimulus and high energy prices, which affect purchasing power. Furthermore, the supply of credit has weakened as banks have begun to tighten their lending standards. Private sector balance sheets have become less vulnerable to rising interest rates thanks to increased liquidity buffers, but high corporate debt can become a problem.

The Fed clearly needs to act swiftly and boldly to keep inflation expectations anchored, and the current health of the economy offers ample scope for this. Yet, over time, the risk of damage to the economy will become more evident. We therefore expect an earlier tightening with a 50bp hike in each of the next two central bank meetings. But this could be followed by a less aggressive stance, with the Fed funds rate hitting a slightly above 2.5% peak by spring next year, below current market expectations of 3%.

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This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-i-timori-di-recessione-limiteranno-linasprimento-della-fed/ on Wed, 20 Apr 2022 05:08:22 +0000.