The Federal Reserve’s latest minutes showed that policymakers expect a “mild recession.” But according to Macquarie’s economics chief, the US economy is likely headed for a more serious downturn. The central bank still won’t come to the rescue of stocks if that happens, David Doyle told Insider.
The US is heading for an even worse recession than the Federal Reserve expects, but the central bank still won’t rescue stocks if that happens, according to Macquarie’s top economist.
David Doyle, head of North America economics at the Australian financial services firm, said in a recent interview that inflation is too high for investors to rely on the prospect of a “Fed put,” which refers to when policymakers ease monetary policy. to support the economy and markets.
“For the past 10 years, the playbook has been ‘buy the dip, and the Fed will always come to the rescue if they see any economic weakness,'” he told Insider. “I’m not so sure that’s going to be the playbook for the next six to 12 months.”
“In other words, the Fed put is probably not as strong as it was two to three years ago, five years ago, or 10 years ago, and that is just a consequence of the inflationary environment we are still in.” added Doyle.
The Fed has raised interest rates from near zero to around 5% in just over a year in an effort to curb inflation, which had been at a four-decade high in recent months before cooling.
Economists have warned that the aggressive rate hikes are likely to drag the economy down — and the central bank’s own policymakers have now acknowledged the risk of a “mild recession,” according to the minutes of its last meeting in March.
Doyle said he expects the US to experience a slightly more severe recession than both the Fed and the market predict. Equities have rebounded in early 2023, with the benchmark S&P 500 up just under 6% despite several signs that the economy is starting to weaken.
“Our view is actually that we are in for something more serious than the Fed is expecting. We are looking for a modest recession, something like what happened in 1990 to 1991,” Doyle told Insider, referring to a period in the in the early 1990s, when US unemployment peaked at nearly 8%.
“For now, the market seems to be shaking off some of those concerns, but I’m quite skeptical that it can continue to do so through the end of the year,” he added.
Doyle isn’t the only strategist to have warned that the era of the “Fed pit” is over.
Karim Chedid of BlackRock iShares said in January that it is time to adjust to a new investment playbook, in which the era of Fed tightening will last until inflation clearly moves towards 2%.
Read more: A reckoning is coming for investors who fail to adapt to a brand new investment playbook, says BlackRock iShares strategist
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