President and founder of Rosenberg Research David Rosenberg warned investors that the U.S. would enter a recession by September due to the Federal Reserve’s “overkill” monetary policy.
“It’s going to be too late by the time they realize all the damage they’ve done,” Rosenberg said. “The economy is going to be in recession. Inflation is going to be falling like a stone.”
The Fed began its latest monetary tightening cycle in March last year to bring down inflation to the target rate of two percent. Since then, the central bank has raised the benchmark lending rate in every Federal Open Market Committee (FOMC) meeting. The current Fed funds rate is in the range of 4.75 to 5.00 percent.
Economists have warned that the Fed’s aggressive policy will push the economy into a recession, even if some officials still expect a soft landing — a condition where the economic growth slows but not to the point of a contraction. According to Rosenberg, Fed officials have insisted on continuing rate hikes despite signs of waning inflation. He suggested the Fed bring the interest rate back to its initial level of near zero.
Recent economic data showed that the U.S. economy had slowed down over the past months. The Richmond Fed reported a manufacturing index of -10 for April, the fourth straight decline for the index. The U.S. consumer confidence hit a nine-month low of 101.3 this month as well. Manufacturers also reported reduced business spending on core materials in March, signaling reduced production volume.
Rosenberg criticized Fed officials for making frequent public appearances to discuss the central bank’s future policy, saying he would “rather hear less from the Fed.” Ahead of the next FOMC meeting, voting members in the Fed’s policy meeting have shared their opinions regarding the need to raise the interest rate further. Fed governor Christopher Waller, for instance, argued for further rate hikes since the growth of core prices had not gone down significantly.
Fed funds futures predict a 25 basis point hike next week, which will be the last rate hike in the current monetary tightening cycle. Investors forecast a rate cut before the end of the year but later than the earlier prediction of September.
‘Bearish’ outlook for equity market
Rosenberg said the recession would have an adverse effect on the equity market. The former Merrill Lynch chief North American economist predicted that the benchmark S&P 500 index on Wall Street would lose 20 percent of its value in a recession, hitting the 3,200 level. The index closed at 4,135.35 on Thursday.
Wall Street posted its worst year since the financial crisis in 2008 last year, with the S&P 500 losing nearly 19.4 percent. All three major U.S. stocks began rallying since New Year due to a more positive economic outlook and expectation of a rate hike pause by the Fed. The indexes, however, gave up some of their gains in February. Analysts also noted that the U.S. equity market was volatile in the following months.
Although the S&P 500 posted a 3.51 percent gain in March, it experienced market turmoil due to a crisis in the banking sector. Two regional lenders, Silicon Valley Bank and Signature Bank, announced sudden closures last month after experiencing a liquidity issue.
Rosenberg said the market had already experienced the impact of last month’s banking stresses in the form of tighter lending conditions imposed by banks on their customers and that the lack of credit availability would heighten the risk of a recession. The economist also said that it was difficult to “gauge how deep this is likely to be.”