Long Read  

Will the US fall into a disorderly recession?

Will the US fall into a disorderly recession?
A television station broadcasts Jerome Powell, chairman of the US Federal Reserve, on the floor of the New York Stock Exchange. (Michael Nagle/Bloomberg)

It is bad news for our ‘pivoting’ camp, a word that in the past few months has been grossly and infuriatingly overused.

Not only is the Federal Reserve speeding up the rate of quantitative tightening, it is also showing no signs that it is ready to change its aggressive tightening policy.

The most dovish remarks in two weeks mostly concern the possible reduction of the pace of rate hikes to two from three for the next session. A double rate hike a year ago would have been considered anathema. Today, it is seen as manna.

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Meanwhile, everyone on the Federal Open Market Committee is focused on inflation numbers

This is bad news for investors, but also bad for the Fed. The US economy is slipping into a seemingly mild recession.

However, the pace of slowdown could accelerate, as external economic conditions deteriorate, the housing market is clearly suffering, manufacturing is contracting and consumers spend their savings and rack up expensive credit card debt to which a divided congress will be of little help.

Meanwhile, credit conditions continue to deteriorate, and this is becoming felt everywhere, from high-yield markets...

...to investment-grade credit spreads and the ever-deep US Treasury markets.

Adhering strictly to its inflation mandate, the Fed often behaves as if the rate for the world’s global reserve currency exists in a bubble. Failure to acknowledge the external risk build-up increases the probability of a financial accident.

The real risk is not the accident itself, it is the 14 years when all manner of accidents were prevented with the use of money printing may have made markets and policymakers complacent. 

We believe that the pivot, orderly (which is our base case) or disorderly (in case of an accident) will come. The question is at what cost to the global economy?

Unfortunately, the Fed is not the only one viewing things parochially. Earlier this month, pundits cheered Jeremy Hunt’s Autumn Statement.

The deferment of some key tax obligations for the period closer to (or after) the general election was seen as a masterstroke to calm markets and at the same time avoid putting too much extra stress on consumption. “We must be very careful not to assign to this deliverance the attributes of a victory,” Sir Winston Churchill might have warned us.

Avoiding a market panic is a very low hurdle to defining a ‘good’ Budget. For one, it does little to alleviate current consumer pains.

Economists see more than 90 per cent probability of a recession for the next year. More importantly, the government failed to convince international investors to return to British risk assets – which they have, by and large, shunned after the referendum.

Meanwhile, the EU sent a warning letter last week that Brexit issues, especially pertaining to the Northern Ireland protocol, remain open, despite the goodwill exhibited by Rishi Sunak’s government.