Asset Allocation & Macro Research Pictet Wealth Management.
Worried that inflation is becoming more broad based and that solid wage gains may perpetuate it further, the Federal Reserve (Fed) has strongly indicated its intention to up the pace of its rate hikes to +50bp (50 basis points) from the +25bp it delivered in March.
After a probable +50bp hike on 4 May, we now expect the Fed to follow with another 50bp move at its June policy meeting. We then expect it to revert to a +25bp rate rise at its July meeting. As the US economy slows over the summer due to rising interest rates and eroding fiscal-policy support, we then think the Fed could pause its tightening.
The risk to our Fed view is mostly to the upside. In other words, rather than pausing, the Fed could decide to continue on the rate-tightening path in the second half of the year, with further +25bps hikes per scheduled meeting irrespective of economic data.
We still do not expect a US recession in the second half of the year but we are watching broader financial conditions closely, in particular in the credit market, which we see as crucial for business investment. We also think the housing market could be the canary in the coalmine when it comes to slowing economic momentum.
We are slightly reducing our 2022 GDP forecast for the US to 3.0% (from 3.2%) due to the effect rising long-term rates, which could have on growth in the second half of the year. We still do not expect a recession. Consumer credit remains abundant for now, helping the US consumer withstand numerous shocks, including the surge in fuel prices. Nonetheless, consumer credit remains at the mercy of tightening financial conditions.
We are raising our 2022 forecast for the US consumer price index (CPI) to 7.6% (from 6.6%) due to the likelihood of renewed upward pressure on imported goods prices. In our new forecast, we see headline CPI at a still-high 5.1% y-o-y in December. But there are numerous uncertainties around this forecast, including the outlook for global commodity prices, which in turn depends on the vigour of the global economy.
