Opinion | Will Recession Expectations Constrain Fed Tightening?

Source: Hongguan Zhuojian

Author: Wang Hanzhuohong et al

The sharp correction in U.S. stocks and U.S. bond yields revealed the fermentation of market recession expectations, however, a substantial economic recession rather than recession expectations may be an indicator closely watched by the Fed in the near future.

Market: The market’s concerns about corporate profitability have caused violent fluctuations in the US stock market. Several Fed officials spoke in favor of raising interest rates by 50bp in June, and market expectations for interest rate hikes are relatively stable.

Interest rate hike expectations are relatively stable, with most market participants betting on a 50bp rate hike in June. This week (May 16-May 20), a number of Fed officials made public speeches saying that the most pressing issue for the Fed is inflation, and they agreed to continue raising interest rates by 50bp at the June FOMC meeting. The Fed will hike rates by 50 basis points each at its June and July meetings, after which the pace of rate hikes will be measured.”

The market has already been price-in in this regard in the early stage, and the interest rate hike expectations this week have not changed much compared with the previous period. Specifically, the current market expects a 95.7% probability of raising interest rates by 50bp at the June FOMC meeting, and is expected to raise interest rates to 2.68% by the end of the year, and raise interest rates by 255bp throughout the year.

U.S. stocks were in turmoil, largely due to concerns about corporate earnings in recession trading. The U.S. stock market has been volatile this week, with the three major U.S. stock indexes all falling sharply on Wednesday, with the Nasdaq down nearly 5%. The reason is that the US retail giants Wal-Mart and Target’s first-quarter results were less than expected and the market’s concerns about the economic outlook were the main fuse.

Fed voter Kashkari said it was “unsure whether the Fed’s actions will lead to a recession in the U.S.”, while voter George said “the volatility in the stock market this week is to be expected and will not change the Fed’s rate hike plan.”

Inflation: Both internal and external supply chains have improved. The number of ships waiting at berths and beyond at the ports of Los Angeles and Long Beach has continued to drop from 48 last month to 32 now, and delays at ports on the east and west coasts of the United States have also dropped significantly; although freight rates are still high, the unit of cargo shipped The year-on-year growth rate of costs continued to moderate.

With the gradual return of truck drivers and the slowdown in freight demand, the rise in transportation costs may continue to decelerate in the future; and with the gradual resumption of work and production under the influence of the epidemic in China, the supply chain problems inside and outside the United States may gradually be alleviated.

Inflation is still the focus of policy, but the Fed may have to start thinking about the timing of loosening under the soft landing appeal. The sharp correction in U.S. stocks and U.S. bond yields revealed the fermentation of market recession expectations, however, a substantial economic recession rather than recession expectations may be an indicator closely watched by the Fed in the near future. As we have continued to emphasize before, the current focus of the Fed is still to fight inflation, with “market correction” taking the second place in the Fed’s response function.

However, in the long run, a soft landing of the economy is still the optimal path chosen by the Fed. If demand falls faster than supply recovers under negative feedback from the market, and the economy has signs of entering recession, the Fed may have to change its policy. Loose timing is taken into account.

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