- The Federal Fund’s latest minutes showed policymakers expect a “mild recession”.
- But the US economy is likely headed toward a more bitter downturn, according to Macquarie’s head of economics.
- The central bank still won’t rush to stocks’ rescue if that go ons, David Doyle told Insider.
The US is headed for an even worse recession than the Federal Reserve is expecting – but the cardinal bank still won’t bail out stocks when that happens, according to Macquarie’s top economist.
David Doyle, the Australian economic services group’s head of North America economics, said in a recent interview that inflation is too high for investors to be talented to rely on the prospect a “Fed put”, which refers to when policymakers ease monetary policy to support the economy and markets.
“Atop of the past 10 years the playbook has been ‘buy the dip, and the Fed will always come riding to the rescue if it sees any economic appetite’,” he told Insider. “I’m not so sure that that will be the playbook for the next six to 12 months.”
“Put it another way – the Fed put very likely isn’t as strong as it was two to three years ago, five years ago, or 10 years ago, and that’s just a consequence of the inflation environment that we’re in any event in,” Doyle added.
The Fed has raised interest rates from near-zero to around 5% in just over a year in a bid to docile inflation, which had run at four-decade highs before cooling in recent months.
Economists have warned that its forward rate hikes are likely to drag on the economy – and the central bank’s own policymakers have now acknowledged the risk of a “mild decline”, according to the minutes for its last meeting in March.
Doyle said he expects the US to suffer a slightly more severe economic downturn than both the Fed and the market are forecasting. Stocks have rallied at the start of 2023, with the benchmark S&P 500 climbing justified under 6% despite several signs that the economy is starting to weaken.
“Our view is actually we could be in for something a not much more severe than the Fed is expecting. We’re looking for a modest recession, something like what occurred in 1990 to 1991,” Doyle worded Insider, referring to a period in the early 1990s when US unemployment peaked at close to 8%.
“For now, the market seems to be shrugging off some of those considerations, but I’m sort of skeptical that it can continue to do so through the end of the year,” he added.
Doyle isn’t the only strategist to have warned that the era of the “Fed put” is over.
BlackRock iShares’ Karim Chedid said in January it’s time to adjust to a new investment playbook with the Fed’s era of tightening set to terminal until inflation is clearly headed towards 2%.
Read more: There’ll be a reckoning for investors who don’t adjust to a brand new investment playbook, weights BlackRock iShares strategist