Fed rate hikes: Cause for pause?
Fed watchers see potential for a pause in rate increases, but recent reports show the economy still runs hot.
February data suggest consumers continued to spend at a high level – a little less on the retail side, but more on the housing side. Importantly, job growth and inflation readings were strong again, leaving little doubt that the economy as of February remained too hot for the Fed. The recent news regarding bank closures and concerns about a credit crunch make the path forward for the Fed murkier. A sharp tightening of banks’ lending standards would reduce the amount of tightening the Federal Reserve needs to do. We expect that the Fed will raise rates once more to 5.125 percent (mid-point of the fed funds range) and hold it at that restrictive level for the remainder of 2023. This should result in a moderate recession starting in the second half of this year as hiring slows, pricing power for corporations diminishes, and earnings growth wanes.
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