There are very few forecasts for a rip roaring economic rebound at this point in the cycle. The spectrum of debate on the global economy ranges from drift downward to an outright full blown recession, and for good cause. The Fed’s track record in managing a soft landing is not strong, and the most bearish view seizes upon this historical track record as an anchor to their views.
Central banks are now facing the toughest of choices since the Financial Crisis: Continue the war on inflation, or push the global economy into a spiral. Historically the Fed has underestimated both the strength of the economic outlook, as well as inflationary pressures.
Today is no exception:
-Inflation: With the Fed target inflation rate of 2%, the Fed sees PCE inflation above 3% by the end of 2023 [we think there is significant risk that this is too low]; thus there is little likelihood for the Fed to curtail rate hikes, and that is assuming their inflationary forecast is right.
-GLobal Economy: Consensus seems to be hovering around a mild recession; tough to argue with the direction, it’s all about severity and timing.
What we think:
-Central bank policy will have to be more nuanced: (1) Continue to fight inflation which will remain well above the 2% target, and therefore offer no “out” with respect to continued rate hikes, while (2) Acknowledging the bank crisis has led to a more fragile economic framework, and companies will come under increased earnings pressure as costs rise and pricing leverage continues to be elusive.
Unlike many of the previous economic recessions, corporate and bank credit profiles remain relatively strong, supporting the thesis that an upcoming recession will be relatively mild.