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A hard landing is guaranteed for the US, Morgan Stanley’s chief US economist has said.
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She said the full impacts of the Federal Reserve’s tightening hadn’t been fully felt in the economy.
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It could take 18 months after the last rate hike to feel the full weight of higher rates.
A hard-landing recession is certain to come for the economy, and high rates are to blame even as markets start positioning for the Federal Reserve to loosen monetary policy this year, says Ellen Zentner, Morgan Stanley’s chief US economist.
Speaking to CNBC on Monday, Zentner responded to Jamie Dimon’s recent comments on the economy, in which the JPMorgan boss warned that the chance of a soft landing was about half of the 70% to 80% odds other forecasters were predicting. He said that was because of several risks still facing the US, including the Fed’s tightening campaign, geopolitical conflict, and interest rates, which central bankers have said could remain higher for longer.
Zentner said she was expecting the US to avoid a recession this year as there was no data to support a soon-to-come downturn. But she warned that a hard landing was unavoidable.
“We will have a hard landing at some point. I guarantee you that. We’re all wondering: When does that come?” she said. “The point that Dimon makes is that there are these cumulative impacts that build over time, and we are in the camp that we haven’t yet seen all of the tightening impacts from monetary policy,” she added, referring to the impact of Fed rate hikes.
Fed officials raised interest rates a whopping 525 basis points in 18 months to tame inflation, a move that’s taken borrowing costs in the economy to their highest level since 2001.
Economists have warned that high interest rates could spark a recession as financial conditions become restrictive and that the full impact of rate hikes probably hasn’t been felt, as they typically take about 18 months to fully work their way through the economy.
Signs of stress are beginning to show in parts of the financial system. Corporate defaults soared last year to their highest level since the pandemic, according to Moody’s Analytics. Bank lending has fallen for three straight quarters, according to Fed data.
Still, signs point to the Fed keeping interest rates elevated as it keeps an eye on inflation. Consumer prices came in hotter than expected last month, with inflation rising 3.1% year-over-year in January.
Zentner predicted that inflation would probably reaccelerate over the first quarter, pointing to the 3.9% growth in core inflation last month. That reacceleration could show up in the next consumer-price-index report, which markets are expecting later this week.
“We do expect inflation reacceleration to be temporary, but that is an open question,” Zentner said, adding that markets might have to consider Fed rate cuts pushed beyond mid-year.
Investors had been pricing in ambitious rate cuts to come in 2024, but many forecasters have dialed back their expectations amid hot inflation data. Markets are now pricing in a 39% chance that the Fed could lower rates by 100 basis points or more by the end of the year, according to the CME FedWatch tool.
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