Pacific Investment Management Co.’s Anthony Crescenzi says the Federal Reserve has credibility with financial markets and “pretty good” odds of sticking a soft landing of the economy.
“Market participants still view the Federal Reserve as credible and will succeed ultimately in achieving its inflation expectation of 2.6% for the end of 2023,” the Pimco market strategist and portfolio manager told Bloomberg Television’s Surveillance on Tuesday. “It does look like the chances of a soft landing are pretty good. The chances of a deep recession are pretty low.”
Crescenzi acknowledged the difficulties facing the Fed in reining in the fastest inflation in decades while preventing consecutive quarters of negative economic output.
“What the Federal Reserve wants is to avoid an outright recession, defined as a decrease in employment and output,” he said. “What it wants is a growth recession, which is the soft landing between 0% growth and 1.8%, which is the growth potential. Navigating it into a narrow runway is challenging.”
After two rate increases and a strategy for more this year, Fed Chair Jerome Powell and his colleagues on the bank’s board have evidence they’re on the right course.
“The Federal Reserve is succeeding in many ways in keeping inflation expectations from moving upward,” Crescenzi said. “It appears as if it’s helping inflation expectations to move downward. You can glance at the yield curve and see you’re not getting much to move out on the yield curve, and that means there’s not much term premium. There would be a larger term premium if inflation were a bigger worry.”
Even if the Fed succeeds in getting inflation under control, either or both the economy and markets could take a hit.
“The question is how it gets there,” he said. “Does it require a lot of tightening or do we get the elusive soft landing?”
--With assistance from Lisa Abramowicz.
This article was provided by Bloomberg News.