Seth Carpenter, Morgan Stanley chief economist and former Federal Reserve deputy director of monetary affairs, thinks there is no way around a sharp slowing of the economy as the Federal Reserve embarks deeper into its rate hiking cycle.
“If you think about what the Fed itself thinks is the long-run sustainable growth rate of the economy, they think that rate of growth is below 2%. And so if you take a growth rate in the economy that’s above 5% or 6%, and you’re going to try to bring it down to below 2%, that 4-plus percentage point deceleration is just a massive, massive deceleration to happen, even if it happens over the course of two years or so. So I think no two ways about it, the slowing in the economy has to be dramatic,” Carpenter said on Yahoo Finance Live.
To be sure, the Fed is in quite the pickle right now as it tries to cool red-hot inflation but not wreck the economy at the same time.
The Consumer Price Index (CPI) rose by 7.9% in February, marking the fastest pace of annual inflation in 40 years amid a push higher in rent, food and used car prices. Meanwhile, the Personal Consumption Expenditures index (PCE) rose 6.4% in February, accelerating from a 6.1% increase in January.
It represented the fastest rate of inflation since 1982.
As prices have climbed throughout the economy, the Federal Reserve has begun to hike interest rates to cool things down. The pace of rate hikes may be quicker than most market participants expect. This week alone market participants have been forced to digest hawkish comments from key Fed members Lael Brainard and Patrick Harker.
In turn, that has placed upward pressure on bond yields and downward pressure on stock prices.
Deutsche Bank’s Matthew Luzzetti became the first economist from a major Wall Street firm to predict a U.S. recession amid these numerous crosscurrents in the economy.
“What I think comes out very clearly is that they’re in a very challenging situation. And I have a lot of sympathy for the bind that they’re in,” Carpenter said.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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