JPMorgan warns that the Federal Reserve’s attempts to put the inflationary genie back into the bottle will slowly spill over into the job market and lead to a recession before the year is out.
Michael Feroli, chief U.S. economist at the Wall Street bank, expects the Fed is poised to stifle growth and destroy demand to prevent medium-term inflationary expectations from taking root among American businesses and consumers.
“I don’t think it’s going to be a very happy year,” Bloomberg said [hotlink ignore=true]TV. “We expect the economy to be in recession by the end of the year due to the lagged effect of the Fed’s monetary tightening here and the additional rate hikes they signaled.”
Last year, the Fed moved from zero interest rates in early 2022 and boosting inflation through monthly bond market purchases, eventually raising rates by 75 basis points in four consecutive policy meetings.
Finally, Fed Chairman Jay Powell raised the Fed funds rate to a full 4.5% to reduce rates of 9% plus inflation.
In the process, risk assets collapsed, with the S&P 500 losing nearly a fifth of its value, its worst performance since the 2008 global financial crisis, while unregulated crypto coins and tokens were affected along with their digital collectible cousins, NFTs.
Investors are hoping to see the Fed eventually turn from putting the brakes on the economy to pulling back on the accelerator by cutting interest rates.
That’s because since Alan Greenspan took over as Fed chairman from inflation-killer Paul Volcker in the early 1980s, many have been conditioned to think the Fed will always be there to bail them out.
The so-called Greenspan countered the persistently stagnant wage growth by making Americans feel it they get richer by inflating the value of their assets – stocks, bonds and real estate.
As globalization and offshoring kept a lid on price pressure, the strategy of adding more and more stimulus worked. But it encouraged the one-sided bets of speculators that led to the dotcom bubble of 2000, the housing bubble of 2006, and finally the stonks bubble of 2020.
However, the impact on global supply chains at the time of the COVID pandemic, combined with Russia’s war in Ukraine, has caused inflation to return to levels not seen since the 1970s, so Feroli believes there is minimal room for maneuver this time around.
A JPMorgan economist predicts that US consumer price growth will likely not return to the Fed’s 2% target rate until early next year.
“Given the seriousness of the inflation problem that we’re dealing with, they understand that the risk of overstretching here is something that just needs to be swallowed and stomached, because there’s still a risk of deflating inflation expectations,” he said. “I think the message you get here today is that more rides are coming.”
Not only are they coming, but Feroli believes the Fed will keep rates at their highest for perhaps a year. Powell’s main concern is the vicious circle of spiraling inflation, which leads to rising wage demands that feed into rising prices.
To break this negative feedback loop, he needs to firmly anchor inflation expectations by dousing the overheated US economy with cold water.
“We still have industrial production near cycle highs; we still have house construction near the high points of the period; So we haven’t really seen the impact of the higher mortgage rates, the stronger dollar,” Feroli explained.
“The labor market has not cooled convincingly and wage growth remains quite strong.”
This story was originally featured on Fortune.com
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