Analysts at Swiss Re have warned that the magnitude of the Federal Reserve’s monetary tightening measures and a weakening consumer backdrop means that a ‘hard landing’ for the US economy is now “unavoidable”.
They note that the Fed’s March FOMC meeting suggests that a challenging macro environment, now complicated by recent banking stress, makes the future path for interest rate rises extremely uncertain, and raises the risk of a central bank policy error.
The country is likely to experience a mild recession later this year, Swiss Re suggests, as consumption is expected to deteriorate as the effect of one-off boosts fade and further benefit reductions are introduced.
“We expect sticky inflation to keep real wage growth in negative territory for most of the year, and even further Fed tightening just as the long and variable lags of 2022’s tightening are becoming more apparent,” explained Mahir Rasheed, Senior Economist at Swiss Re.
Corporate margins are also anticipated to feel increasing pressure, analysts said, with the banking system’s stress highlighting the private sector’s sensitivity to higher interest rates, just as consumption is poised to slow.
“The housing and manufacturing sectors have been in recession since late 2022, and we expect weakening aggregate demand, higher borrowing costs and further tightening in lending standards to compress corporate profit margins,” Rasheed continued.
However, Swiss Re does foresee on a mild recession for the US, given that the pandemic stimulus has left consumer, corporate and state and local government balance sheets in far better shape than in past cycles
Rasheed further notes that historically high job openings suggest the labour market can avoid a sharp rise in unemployment and find a new equilibrium with a better balance of demand and supply.
However, he maintained that a ‘soft landing’ scenario is still unlikely, given the broad and structural nature of pricing pressures today, and core inflation being sustained by a labour market with a severe shortage of workers.
“The Fed is also being challenged by economic data distortions left by the pandemic, such as to seasonal adjustments, that makes it very difficult to determine true economic strength,” Rasheed added. “This creates a dual risk of the Fed either not tightening enough or over-tightening a weakening economy.”
And another factor in the economic outlook is the recent failures of regional US banks, which analysts say reflects the lag in monetary policy reaching the financial system.
“A rapid tightening in credit conditions could even lead to a more disorderly recession, sooner,” Rasheed concluded.
