Fed rate cuts are coming too late to fend off a US recession, research firm says
Federal Reserve Chairman Jerome Powell appears during a Senate Banking Committee hearing on Capitol Hill in Washington, Tuesday, Nov. 30, 2021.
Interest rate cuts have stalled for too long to be an effective cure-all against a recession, a BCA Research analyst wrote for the Financial Times.
Chief global strategist Peter Berezin outlined that evidence of a slowing economy can be found at every turn, indicating that the Federal Reserve may be late in slashing rates. The central bank reduces rates to revive the economy, once inflation is at acceptable levels.
As inflation has slowed sufficiently, the market forecasts that the Fed is ready to ease rates by a quarter point in September. But even if the central bank fulfills this expectation, that won’t cancel out recessionary risk, Berezin said.
“The Federal Reserve is unlikely to save the day. The economy succumbed to recession just months after the central bank started lowering rates in January 2001 and September 2007,” he wrote.
Earlier this summer, Berezin voiced similar concern that a contraction was impending and now reiterated many of the same reasons as to why.
These include strained manufacturing activity and increased stress in both residential and commercial property markets. As these sectors fumble with high borrowing costs, they could amplify woes later on.
For instance, weak home sales have already caused the number of housing units under construction to sink over 8% this year, Berezin noted. If construction continues to erode, it could trigger a wave of layoffs down the road, he said.
Meanwhile, record office vacancies continue to trend higher, offering grim outlooks for lenders in the commercial real estate sector. Given that regional banks are the market’s central loaners, they can expect more losses to come, Berezin wrote.
In more immediate terms, current recession fears largely hinge on the labor market, after it signaled weakness earlier this summer. All eyes are now on Friday’s jobs report, as any hit or miss in the data could be the difference between relief or panic on Wall Street.
Berezin also focused on the job market’s health, noting that rising unemployment will likely erode consumer spending habits in the US — a catalyst for more cooling in the economy.
If the upcoming nonfarm payrolls print is weaker than expected, some analysts expect that the Fed will cut by 50 basis points this month instead. But that might not make much difference, Berezin said.
“Even if the Fed does deliver more easing than is currently priced in, the impact will only be felt with a lag,” he said.
The Fed’s failure to prevent a recession would crater the S&P 500 to 3,800, he forecast, indicating a nearly 31% decline from current levels. The index’s forward price/earnings ratio would fall from 21 to 16, he added.
To brace for this outcome, now is the time to embrace bonds, Berezin wrote. While the 10-year Treasury yield remains above 3.7% currently, he expects it to eventually drop to 3% in 2025.
Other analysts have made similar calls to Berezin. For instance, Renaissance Macro Research chief economist Niel Dutta also considers the Fed as late in cutting, citing that it’s difficult to revive a declining labor market.
