Thus Norman Villamin, Chief Investment Officer (Wealth Management), Union Bancaire Privée (UBP) anticipates the effects of the Fed’s monetary policy on the US economy, in the note “The Fed will push the US economy to the brink of a recession”, in View of the US central bank’s rate announcement, coming this week, Wednesday, July 27:
“The political and monetary priorities of the fight against inflation have forced the Fed to set a growth target below its actual potential for several quarters, to bring inflation closer to 2% and to rebalance the labor market, which according to the FOMC is too rigid.
In terms of growth momentum, this means that activity is expected to slow significantly in the second quarter of 2022: domestic demand must fall below a 2% trend for several quarters to alleviate the inflationary pressures of the US cycle ”.
“Consequently, consumption and the real estate sector are expected to experience a more pronounced slowdown in the second half of the year, as the Fed’s policy will be significantly more restrictive; this will add monetary constraints to the downward pressures already existing on net incomes due to high inflation. Faced with slowing demand, firms will adjust production, moderate investment spending and ultimately reduce demand for labor. The Fed scenario expects the unemployment rate to rise to 4% by the end of next year, but there are risks of upside ”.
“Cooling the economy through sharp increases in interest rates and a reduction in the budget seems particularly challenging for the Fed – continues the UBP – Powell acknowledged during his last testimony in Congress. Against this backdrop, recession risks are increasing rapidly and appear to be as significant as in the Eurozone, but more due to Fed action than the war in Europe. Growth is expected to show a hard landing from 5.7% achieved in 2021 to 2% in 2022 and just 1% in 2023. Downside risks on GDP growth should materialize starting from the third quarter of 2022 and in the period inclusive between the fourth quarter of 2022 and the second quarter of 2023, with a technical recession that will manifest itself around the first quarter of 2023, given that domestic demand will probably contract in this period ”.
“No new support is expected from budgetary policies, other than some possible easing; it is also premature to bet on any change in the Fed’s rhetoric until inflation has given a clear peak and policy rates appear to be above their neutral point ”.