The Chief U.S. Economist of TS Lombard, Steven Blitz, has said that the U.S. Federal Reserve cannot cease its cycle of interest rate hikes unless the country enters a recession. Blitz thinks the cycle cannot end until Fed Chair Jerome Powell creates a recession and unemployment rises. According to Blitz, the Fed is uncertain about the ceiling of interest rate increases without an economic slowdown because they do not know where inflation will settle down. The Federal Open Market Committee’s next monetary policy meeting will occur on March 21 and 22. This meeting will be crucial for global stock markets. Investors are waiting to see if policymakers choose to increase interest rates by 25 or 50 basis points.
Blitz predicted that there would be a recession. He also indicated that the Fed would push the unemployment rate to at least 4.5%, with a potential high of 5.5%. According to Blitz, there are indications of a potential economic slowdown. This may be layoffs occurring in the finance and tech industries and stagnation in the housing market. Furthermore, he suggests that there may be an “asset crunch” and the beginnings of a “credit crunch” as banks start to reduce their lending.
Blitz thinks that either a recession will occur mid-year and the top rate will be 5.5%, or there will be enough momentum for the Fed to continue, and in that case, the Fed’s rate could reach 6.5% before things start to slow down and reverse. He emphasizes that in terms of risk assets, it is not a matter of whether a recession will happen but rather when it will occur, and the longer it takes, the higher the rate has to get.
Blitz’s remarks came after Powell’s statement on Tuesday. Here, Powell acknowledged better-than-anticipated economic indicators in recent weeks. He suggested that the “ultimate level of interest rates is likely to be higher than anticipated.” Powell’s statements have caused bond yields to increase and the U.S. stock markets to decline.
The anticipated terminal Fed funds rate was around 5.1% in December but has increased steadily. On Tuesday, Goldman Sachs raised its terminal rate target range forecast to 5.5-5.75%. According to CME Group data, this was in line with current market pricing.
However, bond yields rose, and U.S. stock markets sold off sharply in response to Powell’s comments. The Dow closed almost 575 points lower, the S&P 500 slid 1.53% to close below the key 4,000 threshold, and the Nasdaq Composite lost 1.25%.
Furthermore, the January consumer price index rose 0.5% month-on-month due to the rising costs of shelter, gas, and fuel. This means that the decline in inflation experienced in late 2022 may be about to reverse. However, the labor market remained strong, with 517,000 jobs added in January and the unemployment rate hitting a 53-year low. The Labor Department will release the February jobs report on Friday, while the February CPI reading is slated for Tuesday.
At last, Blitz stressed the significance of the Federal Open Market Committee’s next monetary policy meeting. The release of the February jobs report and CPI reading is forthcoming. The February jobs report will provide information on the state of employment in the United States.