JPMorgan Funds chief global strategist David Kelly and research analyst Stephanie Aliaga have argued that the measures are aggressive and the Fed needs to soften its approach.
“Such an aggressive approach would probably be a mistake,” they said in a note to customers.
“While inflation will not die off quickly without a recession, it should gradually drift lower. If that’s the case, the Federal Reserve should have the patience to let it happen, rather than trying to hasten its decline at the risk of plunging the economy into recession.”
US first-quarter GDP contracted 0.35 percent, surprising most forecasters. But a trade imbalance was largely to blame because of an 18 percent surge in imports. Consumer and business spending continued to rise.
Mr Kelly and Ms Aliaga said a resolution to some supply chain issues and weaker-than-expected wage growth should defuse demand and hence inflation somewhat.
They found that union membership in the US continues to decline and some wage bargaining power may be lost in a less unionized workforce, which would weaken wage growth somewhat.
But in the opposing camp at Goldman Sachs, according to chief economist Jan Hatzius, there is still a labor shortage. As a result, wages will continue to rise, fueling inflation and keeping the Fed as hawkish as ever.
Mr. Hatzius now believes the Fed could hike rates above 3.25 percent.
“In order to reduce wage pressures to levels that are at least broadly in line with the Fed’s inflation target, we believe the job-to-employee gap needs to narrow by at least half a percentage point,” he said.
“We further estimate that this means GDP growth may need to slow to the 1-1.5% range, even weaker than our below-consensus forecast of 1.9% for 2022.
“This will likely require significant tightening of financial conditions from current levels and could well mean a higher maturity ratio than our baseline guidance of 3% to 3.25%.”
Deutsche Bank global economists David Folkerts-Landau and Peter Hooper expect the Fed’s interest rate to peak over 3.5 percent next year, even higher than Goldman Sachs’ forecast.
They also expect that the Fed’s quantitative tightening – or balance sheet reduction if it stops buying bonds – will add at least another 75 basis points of corresponding rate hikes.
Such aggressive monetary policy will result in a technical recession next northern winter before inflation falls and the Fed reverses some of its rate hikes.
“We recognize the great uncertainty surrounding these forecasts, but also note that the risks to the downside and a deeper downturn are significant,” said economists at Deutsche Bank.
When you consider that just six months ago, hardly anyone thought the Fed would hike rates this year, it’s easy to see why economists add such waivers to their forecasts.
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