US - A hike around mount recession

US - A hike around mount recession

Fed sows doubts about its recession intentions to calm wages and inflation.

The Federal Reserve’s (Fed’s) recent communication is very clear: the priority is fighting high inflation and avoiding a wage-price spiral like in the 1970s.

Less clear is how far the Fed is willing to go to calm these nascent inflationary pressures.

Some current and recently-departed policymakers allude to the idea that if this means an economic recession then so be it as inflation credibility needs to be restored.

Nevertheless, we think the Fed has a profound DNA – which we believe is to avoid a slide into recession above all matters – and this DNA we think will re-emerge later this year and make the Fed halt its monetary-tightening plans as it reassesses US macro data.

However there is a risk that the Fed may tighten in straight line and realise, but too late, the extent of the sharp tightening already under way in market and credit conditions; by then, the US economy may have already fallen into a dangerous recession spiral especially if collective psychology pivots. The risk of a Fed policy mistake is high.

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