August 8, 2022
US faces ‘L-shaped’ recession as Fed scrambles to contain inflation

According to a top analyst, the US economy will have to remain in recession longer than expected for inflation to be brought under control.

Zoltan Posser, global head of short-term interest rate strategy at Credit Suisse Group AG, wrote a client note emphasizing broad sentiment that the worst of inflation may be behind us and the Federal Reserve will begin lowering interest rates.

Instead, the US may be gearing up for a so-called “L-shaped” recession, according to Posser, which will be deeper and longer than expected.

Posser cited supply chain disruptions by the ongoing Russian invasion of Ukraine as well as intermittent COVID-related lockdowns in China.

Inflation has risen to levels not seen in four decades.
Inflation has risen to levels not seen in four decades.
Getty Images

“War is inflation,” Posser wrote. His The note was previously cited by Bloomberg.

“Think of economic warfare as a battle between the consumer-driven West, where the level of demand is maximized, and the production-driven East, where the level of supply is maximized to meet the needs of the West. ”

Posser cited restrictions on immigration and a reduction in mobility brought on by the pandemic as key factors that have resulted in a tight labor market.

As a result, Posser writes that the Fed may need to raise interest rates to 5% or 6% and keep them there for a sustained period to cool consumer demand so that it can match tight supply. Can eat

Meanwhile, analysts at Goldman Sachs are warning investors against complacency, while noting that the economy remains at risk of a recession.

Goldman analysts wrote, “Given the re-pricing of cyclical assets in the US and EU, we think markets are too complacent to hedge bearish risks on expectations of a more accommodative monetary policy stance too soon.” Maybe.”

note was First reported by Insider.

Goldman analysts think investors may be mistaken in their belief that the Fed will stop raising interest rates — and perhaps start cutting them as soon as next year — in hopes of avoiding a recession.

Economists at Citigroup have raised the likelihood of a recession to 50%. Citi’s global chief economist, Nathan Sheets, said the current economic data constitutes the Fed’s “worst nightmare”.

The Fed is trying to "to land softly" - Raising interest rates while trying to avoid taking the economy into recession.
The Fed is trying to make a “soft landing” – raising interest rates while trying to avoid putting the economy into recession.
AFP via Getty Images

Sheets said the Fed is bound as it tries to combat both stubborn inflation as well as slowing demand around the world.

“It’s really hard for central banks to fight this,” Sheets said. “I am cautious to use the term, but at the moment it seems we are going through a period … [of] momentary stagflation.”

“Given the re-pricing of cyclical assets in the US and EU, we think the market may be satisfied very soon in reducing recession risk on expectations of a more liberal monetary policy stance.”

Top economists such as Nouriel Roubini said the Fed must choose between tolerating high inflation and pushing the economy into recession.

Last week, the Fed raised its benchmark interest rate by 75 basis points – the second straight month it did so – and for the first time since 1994 the central bank raised rates by 0.75% in two consecutive months.

The latest rate hike came two weeks after the federal government released figures showing prices rose 9.1% in June – the most since November 1981.

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