Santander | It is one of the first headlines from last night’s FOMC minutes. Fed staff members go from assigning a near 50% probability, to now forecasting a mild recession.
With the Fed also nearing the end of the cycle, it is no surprise that some dissenting voices are beginning to appear, opening the door to new bouts of volatility that have not favoured the credit market (MOVE/Main correlation of 85% in 2022). Mary Daly (no vote this year) yesterday stated that there are good reasons both to continue raising rates but also not to do so given the possibility that the economy will now slow down “without further monetary policy adjustments”. This comment comes a day after Austan Goolsbee (voting) suggested “caution and patience”. Indeed, the minutes reveal a fear that is spreading: “recent events are likely to result in tighter credit conditions for households and businesses, weighing on economic activity, hiring and inflation”.
For the time being, however, our economists attach more importance to another sentence in the minutes and point to a final 25bp hike in May and stability until the end of the year: “noting persistently too high inflation and a labour market that remains tight, participants felt that further monetary policy tightening might be appropriate”. In short, there are still curves for credit markets that will have to face a higher probability of recession/economic slowdown this year and more rate hikes, both from the Fed and the ECB (€STR forwards are already discounting 75bp again until September). And inflation, while easing in the US, continues to show a picture of stress at the core level. According to our economists, goods inflation will continue to fall and decelerate but services inflation is still far from having started to adjust outright. And with demand still very robust in some markets such as real estate, where the adjustment is still to come. And they believe it will take a further deterioration in final demand for some of these segments to adjust.
