The CEO of a major financial advisory and asset management company expressed that investors are increasingly concerned that a major recession in the US economy could result from the possible overtightening of policy by the Federal Reserve.
According to deVere Group’s chief executive Nigel Green, the Fed’s latest meeting minutes released Wednesday signal that the chances of the US economy plunging into a recession are growing. The Federal Reserve plans to remain aggressive in raising rates in 2023, agreeing that “cuts shouldn’t occur.”
The Delayed Impact of Rate Hikes
Bankrate.com’s chief financial analyst, Greg McBride, echoed Green’s concerns. There has been no letup in inflation, the labor market remains strong, and the economy is resilient despite a rapidly cooling housing market. As a result, the Fed is forced to maintain its aggressive interest rate policy.
In 2023, interest rates will be at their highest level in 40 years, and the cumulative effect will slow the economy, perhaps significantly. There have been 16-year highs in mortgage rates, 14-year highs in home equity lines of credit, and 11-year highs in auto loan rates in the past year. If savers shop around, they can find the best yields since 2009.
We could see a rapidly slowing economy in 2023 due to this lagged effect of interest rate hikes coupled with declining equity and bond prices. We will suffer the pain well before we see any benefit. The economy is expected to slow much faster than inflation, so we won’t see any positive effects for a long time.
A Decrease In Housing Demand
Marty Green, principal at Polunsky Beitel Green, believes any interest rate increases in 2023 will be in the more typical 25 basis point increments, despite the likelihood that rates will continue to hover near record highs.
It is interesting to note that mortgage market participants still believe that this year, interest rates will actually fall. Inflation and potential recession effects are of particular interest to the market, which may have better estimates than the Federal Reserve when it comes to inflation and the possibility of a recession.