Recession question not if but when: MFS

Yasmine Raso

Senior Journalist, Financial Newswire

28 July 2023

MFS Investment Management (MFS) has forecasted a “postponed” recessionary onset after a stronger than expected Q1 US gross domestic product (GDP), higher income levels and lower unemployment.

Chief Economist and Fixed Income Portfolio Manager, Erik S. Weisman, said despite the numbers barely indicating a “mini banking crisis” just a few months ago, the most likely scenario of a recession remains but its timing is “murky”.

“While a recession doesn’t look imminent, monetary policy takes time to work its way through the economy. Think about businesses that sign contracts that last 12, 18 or 24 months,” he said.

“The Fed can raise rates an awful lot during those periods and not have an immediate impact on the economy. You might not feel the full impact of these hikes for 12 to 24 months — we’re in that window now.

“Central bankers are mindful that they lost credibility by sticking too long to a narrative that inflation was transitory, a result of pandemic-driven supply chain disruptions. Looking ahead, I’m concerned that they may overcompensate and remain more hawkish than expected.”

Weisman emphasised that the renewed strength of the labour market and climbing income generation would lead to more consumer spending and keep inflation higher than it might otherwise be.

“That won’t get inflation where the Fed wants it to be,” he said.

“It should be the case that you have to weaken the labour market for the Fed to meet its inflation targets. Are they willing to maintain rates at restrictive levels in the face of a sharp economic downturn if they think it is the only way to tame inflation?

“Or will they revert to the script of the past 30 years, easing policy at the first sign of trouble, perpetuating the so-called Fed put? We won’t know until or unless growth slows and inflation becomes stuck meaningfully above target.

“At that point, central bankers will need to choose the policy error of least regret. Do they deepen a recession by maintaining restrictive policy or do they rekindle inflation by easing too soon?”

Weisman said the Fed would be examining the data that comes in the months ahead before it confirms its tightening cycle has officially come to an end.