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Recession fears renewed after Fed hikes rates

Yasmine Masi17 June 2022
Inflation barometer

At its latest meeting, the U.S. Federal Reserve (Fed) announced it was hiking interest rates by 75 basis points to 1.75 per cent to curb inflation, prompting renewed concerns of a U.S. recession in 2023.

This comes after the Consumer Price Index (CPI) figures released in May showed headline inflation had reached a 40-year high, with financial markets anticipating this move from the Fed as it reaffirmed its pledge to lower inflation.

“The risks around a recession in 2023 can’t be ignored,” Kerry Craig, Global Market Strategist from J.P. Morgan Asset Management, said.

“As the Fed restated its commitment to returning inflation back to the 2% target, this means that the Fed may be willing to sacrifice the economy to achieve this.”

“The new set of economic projections brings down the expected growth rate to 1.7% and the core PCE inflation rate to 2.7% over the course of 2023.

“However, the unemployment rate moves up to 4.1% over the same period. This captures the conflict facing the Fed in generating the fabled soft landing of the economy.”

Craig also said the Fed intends to reduce inflation without increasing the unemployment rate as labour supply and demand shortages smoothen over and wage pressures ease.

“Our view is that the only way the Fed will really contain inflation is through demand destruction, which increases the risk of a recession and higher unemployment rate,” he said.

Steve Miller, Advisor at Grant Samuel Funds Management (GSFM), also said the markets responded positively to the Fed’s news but doubts remained about the longevity of these moves.

“Bonds and equities rallied while the USD depreciated,” he said.

“Volatility is likely to remain elevated and the USD seems a safer place over the medium-term than either EUR, GBP and even JPY ahead of central bank meetings in those jurisdictions.”

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