Will the Federal Reserve Board be able to control inflation through aggressive interest rate hikes without creating a full-blown recession?

Schwab Chief Investment Strategist Liz Ann Sonders has doubts.

“There are more instances in the past of tightening cycles ending up in inflation versus a soft landing. That doesn’t automatically mean you establish as your base case a recession each time,” but with at least a portion of the yield curve inverting, indicators are pointing to “elevated recession risk,” Sonders said during a Schwab Market Talk webcast yesterday.

Even in a normal market cycle it’s hard for the Fed to engineer a soft landing, the veteran analyst noted.

“Now whether the unique circumstances connected to this cycle make it easier to land the plane softly, I’m skeptical about that given what they’re trying to do in combatting inflation and knowing that they can’t directly target supply chain disruptions. They can’t cause a ceasefire between Russia and Ukraine to bring energy and food prices down. Really what that leaves them with is trying to rein in aggregate demand and slow economic growth,” Sonders said.

Slowing economic growth in addition to fighting inflation is a tall task, she said.

“Even if a recession isn’t a lock, I think engineering a soft landing is arguably a little trickier this time than it has been in the past,” Sonders said.

Fed Takes Aggressive Stance
Kathy Jones, Schwab’s chief fixed-income strategist, said during the webcast that Fed officials have made no secret about their plan to move aggressively to raise rates. “We heard very clearly from various Fed officials ... that they plan to move fast and raise rates perhaps in 50 basis point increments instead of 25 basis points and get that short-term rate up to neutral—which in the Fed’s book is roughly around 2.5%.”

Federal Reserve Governor Lael Brainard said yesterday that “the committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting."

Inflation is currently at 7.9%. The Federal Open Market Committee (FOMC) will release minutes from its March meeting today which could provide further details of the central bank’s plan to reduce its $9 trillion balance sheet of Treasury securities and mortgage bonds.

First « 1 2 » Next