Bear Market Deepens As Fed Official Warns Rate Hikes Will Trigger 'Failures' Around Global Economy

Topline

The Federal Reserve’s interest rate hikes further tanked the housing and stock markets this week, but signs that the job market may not be cooling quickly enough could mean the economy has much more to lose before decades-high inflation subsides—feeding concerns that a recession may only be inevitable, even if not immediate.

There is “almost no evidence” that inflation has peaked, Minneapolis Fed President Neel Kashkari … [+] said at a Thursday conference

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Key Facts

The Atlanta Fed’s GDPNow model, which forecasts economic growth expectations in real time, on Friday estimated that the economy grew 2.9% in the third quarter—hitting its highest level yet after the unemployment rate unexpectedly returned to a 50-year low of 3.5% last month.

Though strong employment is good for job-seekers, David Donabedian, the chief investment officer of CIBC Private Wealth, explains the report is “not good news for the Fed,” which wants to see the job market slow down enough to help ease inflation before pivoting on interest rate hikes that have tanked stocks and stoked recession fears this year.

There is “almost no evidence” that inflation has peaked, Minneapolis Fed President Neel Kashkari said at a Thursday conference, noting that officials are “quite a ways away” from halting rate hikes and warning he “fully” expects there are going to be “some losses” and “some failures around the global economy” as markets digest the higher interest rates.

In a Friday note, EY chief economist Gregory Daco said he anticipates a recession as a result of the aggressive Fed action, with job growth likely turning negative over the next three to six months and the unemployment rate rising toward 5% by the middle of next year—suggesting more than 4 million people could become unemployed.

Others are more bearish: Morgan Stanley on Thursday told clients the economy has entered a “danger zone” in which Fed policy has become restrictive enough that “it’s only a matter of time” before a “fast and furious” market event convinces the Fed to pivot; in the past, such events have included the collapse of the dotcom bubble, an oil price shock and a downturn in housing prices.

Though the investment bank’s Michael Wilson cautioned that no one yet knows what type of event it could be this time, he believes the rate hikes will inevitably cause an “oncoming earnings recession” for corporations in the next few months that could see the S&P 500 plunge another 15% (it’s already down 24% this year after surging 27% in 2021).

As experts weigh whether the nation may plunge into a recession, here’s how the economy’s main pillars are holding up:

Housing Market

The housing market continues to be one of the sectors hardest hit by the Fed’s rate hikes. Mortgage applications plummeted to their lowest level since 1997, according to data released Wednesday by the Mortgage Bankers Association. In a Tuesday note, Goldman Sachs economists said they aren’t yet forecasting a recession for this year but do see a “narrow path” to avoiding one, with the speed of the deterioration in the housing market representing a key risk that could spell trouble for the broader economy.

Stock Market

With prolonged inflation forcing the Fed to hike interest rates more aggressively than previously expected this year, stocks have suffered as a result. Major stock indexes minted a historic two-day rally to start the week but immediately plunged back toward their yearly lows after payroll processor ADP reported there were a better-than-expected 208,000 new private-sector jobs added last month, dashing hopes that the Fed may pivot from its aggressive stance. After this week’s losses, the S&P is just 1.5% shy of hitting a nearly two-year low.

The Fed

The Fed is deep into its most aggressive economic tightening campaign since the late 1980s, and it’s still expected to raise rates by another 125 basis points this year. However, that’s largely contingent on incoming economic data. Investors are hoping for better-than-expected inflation data on Thursday to help justify smaller hikes. As of now, it looks almost certain officials will raise rates by another 75 basis points in November—pushing borrowing costs to a new 15-year high.

Labor Market

Despite growing waves of layoffs at giant corporations, the job market has remained one of the economy’s sturdiest pillars this year, and Fed officials have long pointed to the strength to justify additional rate hikes. The September jobs report only bolstered that point, but signs of a potential turnaround have started emerging. Hiring intentions, which measure the number of new jobs employers plan to add, fell to their lowest level since 2011, according to career services firm Challenger on Thursday. Meanwhile, new jobless claims jumped 15% to 219,000 last week, coming in higher than projected and ending a ten-week streak of better-than-expected data.

Bear Market Deepens As Fed Official Warns Rate Hikes Will Trigger ‘Failures’ Around Global Economy