US Federal Reserve Chairman Jerome Powell had recently held out hope for interest rate cuts in 2024 – but inflation in the US remains stubbornly high. Alex Brandon/AP Photo
According to a BMO strategist, the Federal Reserve may have to create a recession itself if it wants to hit its target inflation rate.
Ian Lyngen told Bloomberg TV that the Federal Reserve may not consider its current monetary policy to be restrictive enough.
Markets have given up hope of a rate cut in June following the latest CPI report.
This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and checked by a real editor.
The latest inflation report not only left the Bond yields skyrocket and stock prices plummetbut could also put the US back on the path to recession, an economist speculated on Thursday Bloomberg TV. The catch: Such a downturn would be brought about by the US Federal Reserve itself.
“If we continue to receive inflationary pressures at these levels, the [Federal Reserve] “We see ourselves backed into a corner where it has to cause a recession if it wants to maintain the 2 percent inflation target,” said Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets.
His comments follow the consumer price index for March, which was released on Wednesday with an increase of 3.5 percent on an annual basis higher than expected fell short, while forecasts were 3.4 percent year-on-year. The rate was higher than in January and February.
Is the US Federal Reserve even raising interest rates?
This has the Betting the markets expectations of a quick interest rate turnaround by the Fed have essentially been wiped out, as the futures markets no longer expect June as the starting point for easing. Instead, the majority of investors hold, according to the CME FedWatch Tool September is more likely – even if the probability is less than 50 percent.
The Fed recession risk could arise if the central bank realizes that its current key interest rate of 5.25 percent to 5.50 percent is not restrictive enough to contain inflation, Lyngen said.
This echoes recent warnings from others that the Fed could come under pressure to raise interest rates.
Does the inflation target in the USA need to be adjusted?
Frances Donald, who also took part in the Bloomberg interview, agreed, pointing out that the risk of recession is increasing as the Fed loses the data that prompts it to cut interest rates in the short term.
“Now that we’re back in an environment where we’re losing these embedded rate cuts, the likelihood of something bad happening here actually has to go up,” the chief economist at Manulife Investment Management warned, adding: “They may have to stay higher until something happens. That’s the problem.”
Some have suggested that it is time for the Fed to adjust its inflation target to 3 percent and thereby reduce these risks.
Leading economist Mohamed El-Erian is among this group and recently warned that interest rate policy will continue for years remain unchanged must if the Fed wants to achieve an inflation rate of two percent.
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