As we said in a previous article, the head of the Federal Reserve Bank of New York, John Williams, said on Tuesday that it might take several years for inflation to return to 2%. A slightly more "soft" point of view is held by his colleague, the head of the Federal Reserve Bank of Atlanta, Rafael Bostic. He did not make forecasts about when inflation could return to the target level but noted that its slowdown could lead to the fact that the rate hikes will begin to decline. He also noted that the situation in the economy remains uncertain. There are risks in favor of a more "timid approach to rates" and a more "aggressive" one. Everything will depend on the upcoming inflation reports.
At the same time, Goldman Sachs analysts believe that the rate will have to be raised by more than 3.5%, as John Williams and James Bullard mentioned earlier. The bank said its forecast is to raise the rate by 0.5% in September and 0.25% in November and December. However, "since Powell said that the Fed will closely monitor macroeconomic statistics, we believe that the risks of the pace of monetary policy tightening at the next meetings are inclined in favor of an increase," said Jan Hatzius, chief economist at Goldman Sachs. As we can see, the risks of a longer and stronger rate hike are growing, and the risks of a recession are also growing. Technically, the recession has already begun, and now few people believe it can be avoided. However, the US dollar does not react to it in any way, remaining very high compared to the euro or the pound. The US stock market should continue its new round of decline, as there are no prospects for completing the cycle of tightening monetary policy in the near future. We should also not forget that starting from September 1, the pace of the QT program (quantitative tightening) will increase to $ 95 billion per month. The US economy will lose about $100 billion every month. The money supply will shrink. Therefore, the demand for all types of assets will fall.
At the same time, former Morgan Stanley chief economist Stephen Roach believes it will take a miracle to avoid a recession. He recalled the actions of Fed Chairman Paul Walker, who in the 80s actively raised the rate to fight high inflation, which increased unemployment by 10%. According to Roach, unemployment in the US will rise to 5–6%, but the key rate still needs to be raised to the "restraining area." Roach calls consumers who will one day pass the "point of no return" and come to terms with high inflation as a trigger for the transition to a recession. After that, costs will begin to decline, and the labor market will shrink.
