Will humble and nimble Fed policy avoid recession
- 20 June 2022 (7 min read)
Key points
- Inflation is too high and looks set to remain so throughout 2022. The Federal Reserve has embarked on a swift policy tightening to quell domestic pressures
- The US has achieved few soft landings. It will be difficult again this time given the significant structural uncertainties in the post-pandemic economy
- The Fed’s own policy implementation faces additional uncertainties. The impact of policy depends on the tightening in financial conditions and this relationship is complex. Conditions have tightened beyond thresholds that have historically seen the Fed relent in previous tightening phases. Going forwards the Fed will be torn between slowing activity sufficiently to rein in inflation and the risk of tipping the economy into recession
- The Fed’s balance sheet unwind – quantitative tightening (QT) – adds additional uncertainty. This is both through uncertainty over the impact of QT and large amounts of overnight reverse repo holdings
- On balance, we think the US can still avoid recession over the next 12 months, but this likely depends on the Fed’s cycle ending before markets currently expect (at 3.25%) and conditions not tightening further on other developments.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorized by AXA IM, prohibited.