Although indicators such as US credit card debt point to financial and economic pressures, another global financial crash is not imminent, believes UBS chief US economist Jonathan Pingle.
U.S. credit card debt rose to $1.08 trillion in the third quarter of 2023, data from the Federal Reserve Bank of New York showed earlier this month. This has raised concerns about what rising debt levels, driven at least in part by higher prices, could mean for the broader economy.
However, Pingle told CNBC’s Joumanna Bercetche on Wednesday that it was difficult to view the data as a systemic risk.
“I don’t think we’re facing the next global financial crisis [global financial crisis]”, he said on the sidelines of the UBS European conference.
The credit crunch actually plays a role in delaying the Federal Reserve’s monetary policy impact on the economy, Pingle said. “We are still waiting for these credit issues to dampen activity in 2024,” he said.
Credit tightening tends to precede credit growth by several quarters, so the full impact is not yet clear, he said.
According to Pingle, several other factors also play a role. These include concerns about regulation in the wake of the collapse of Silicon Valley Bank, which raised concerns about the health and stability of the banking sector and triggered a crisis in regional banking and “rapid” interest rate hikes, he said.
The Federal Reserve began raising interest rates in March 2022 to curb inflation and cool the economy. Since then, there have been 11 interest rate hikes, with the target range for the key rate increasing from 0% to 0.25% to 5.25% to 5.5%.
The Fed opted to leave interest rates unchanged at its two most recent meetings, and the lower-than-expected reading of the October Consumer Price Index on Tuesday led traders to all but rule out the chances of a rate hike at the central bank’s December meeting.
The CPI was flat from September, reflecting a 3.2% increase year-on-year, while the so-called core CPI, which excludes food and energy prices, was 4% year-on-year. This was the smallest increase since September 2021.
“This is great news for the Federal Reserve in its effort to restore price stability,” Pingle told CNBC on Wednesday. Still, they are “not out of the woods yet,” he added, saying there is “still a long way to go” before the Fed meets its 2% inflation target.
However, there is a trend toward disinflation, Pingle said, and if the Fed can slow the economy, it could make great progress toward its inflation goal.
“We think it will likely increase to 2 next year. It’s already falling faster than the Fed expected,” he said.
In order for inflation to remain stable at around 2%, Pingle expects the economy, including the labor market, to weaken further.
“The path to two-and-a-half years is pretty clear in our view, but the final step down will require some softening in the labor market in our view,” he said.
In its 2024-2026 U.S. economic outlook released Monday, UBS said it expects unemployment to rise nearly 5% next year and the economy to enter a mild recession. In its report, UBS assumes that the economy will shrink by around half a percentage point by mid-2024.
A looming recession has been one of investors’ biggest fears throughout the Fed’s rate-hiking cycle, as many worried that rates would be raised too quickly and too high.
They are therefore hoping for an end to the interest rate hikes soon and for indications as to when the Fed might start cutting interest rates again.
UBS expects significant rate cuts in 2024 and predicts rates could be cut by up to 275 basis points over the course of the year.
Interest rates would be cut “first to prevent the key interest rate from becoming more restrictive as inflation falls, and later in the year to contain the economic slowdown,” the Swiss bank said.
Rate cuts will therefore be a two-stage process, Pingle explained, and could begin relatively early in the year.
“As early as March they should probably start calibrating at least the nominal policy rate,” he said, while the second phase would likely begin when unemployment starts to rise.
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