Interactive Brokers economist sees growing risk of stagflation – here’s why
Interactive Broker Senior Economist Jose Torres alert about the growing risks that the U.S. economy will enter a stagnant inflationary environment in which inflation remains high while economic growth and employment cool.
Leading the way amid potentially stagnant inflation, Federal The Reserve has ramped up the hawkish monetary policy it started in March through raising interest rates and cash flow on its balance sheet to reduce the highest level of consumer price inflation seen in nearly 40 years. . This is the strongest tightening cycle since Volcker in the 1980s.
Still, the US central bank “has a long way to go to tame the upside,” Torres said. Fed officials also echoed Torres’ view that war against inflation is not close to completion. Fed’s policymaking arm in December raise its benchmark rate rose 50 basis points, down from 75 bp gains in the previous four meetings and signaled further rate hikes in 2023, citing the still tight labor market, to bring inflation back up. 2% target again.
The Core PCE Price IndexThe Fed’s preferred inflation gauge, which cooled both M/M and Y/Y in November, but the Y/Y figure of 4.7% is still well above the Fed’s target, implying a stance monetary policy “higher for longer”.
“As the Fed continues to tighten financial conditions, it will put downward pressure on money supply and inflation, upward pressure on short-term interest rates, and downward pressure on GDP,” Torres said. However, domestic production is estimated at up 3.2% in Q3rebounded strongly from a 0.6% decline in Q2 amid stronger consumer spending and non-residential fixed investment.
For the fourth quarter, however, Torres expects GDP growth of 0.6%, citing several leading economic indicators, including jobless claims, retail sales and consumer confidence. consumption. He said the recession, highlighted by weakness in the housing and manufacturing sectors, combined with tighter credit conditions and higher interest rates would “ultimately lead to high unemployment.” slightly more in 2023″.
weekly Initial unemployment claim came in at 216K, which was lower than expected and a slight increase from 214K in the previous reading. That number also roughly corresponds to pre-pandemic levels. While that’s a modest increase, the higher number ultimately points to “lower consumption/demand, lower inflation, lower long-term interest rates and lower GDP growth,” the economist said. explain.
And while the official unemployment rate of 3.7% suggests a tightening labor market may continue to contribute to inflationary pressures, the Fed’s December forecast calls for a peak unemployment rate of 3.7%. 4.6% in 2023. Some say 4.6% is still a low rate, “but it’s about the rate of change in the economy that will move with the rate of change in the unemployment rate. Karma,” speak David Rubenstein, founder and president of Rosenberg Research & Associates, in a recent interview hosted by Wealthion.
“We’ve never had a recession with unemployment rising by more than a point,” he added. “In fact, the mean and the median are close to 0.6% of the gain.”
Elsewhere, November was worse than expected retail sales This figure also supports the view that GDP growth will be lower. In recent months, consumers have spent less as the Fed works to reduce demand and inflation reduces their purchasing power. Consumer psychologyContinuing to recover in December from a month earlier, but still at historic lows, is expected to continue at lower levels “as the Fed continues to tighten credit conditions and,” Torres said. interest rate hikes, slowing demand.
Elsewhere, a continued contraction in key production data shows lower GDP growth ahead.
Earlier this month, (December 12) a Deutsche Bank survey showed that investors are bearish on the S&P 500 in 2023, see the risk of high inflation.