Fed lifts rates by another 75 bps: recession could hit in Q1 of 2023
- U.S. Fed lifts rates by another 75 basis points on Wednesday.
- Strategist Seema Shah reiterates a recession is likely in early 2023.
- SPX is least bothered since a 75-bps increase was well telegraphed.
The U.S. Federal Reserve on Wednesday raised rates by another 75 basis points to fight inflation that climbed to an alarming 9.1% in June.
What does the Fed signal for its September meeting?
The overnight rate is now between 2.25% and 2.50% – a range unseen since December 2018. Still, the equity market is least bothered because a 75-bps increase was very well documented.
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According to Chair Jerome Powell, the central bank will eventually go easy on lifting rates but could that be in September remains unclear.
As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.
Members of the FOMC voted unanimously to raise rates by three quarters of a point on Wednesday.
U.S. economy could slide into a recession by early 2023
Powell agreed that signs of a slowdown had started to show in the economy, which might just strengthen the recent debate around “rate cuts” by next summer.
Seema Shah (Chief Strategist at Principal Global Investors), however, does not see such a possibility. In an interview with Yahoo Finance, she said:
The market might be a bit too optimistic if it’s expecting rate cuts as soon as next summer. We’re expecting a peak rate of 4.25% and a recession to hit the U.S. economy in the first half, probably the first quarter of the next year.
U.S. economy shrank at an annualised pace of 1.6% in Q1 of 2022. The next update, which is all the more crucial considering another quarter of negative GDP will “check” the technical definition of a recession, is scheduled for tomorrow.