Federal Reserve's tightening policy could now lead to major recession, warns CEO

But mortgage analyst says residential market remains optimistic despite looming recession risk

Federal Reserve's tightening policy could now lead to major recession, warns CEO

Investors are increasingly concerned that the Federal Reserve could overtighten and steer the US economy into a major recession, according to the CEO of a major financial advisory and asset management company.

deVere Group chief executive Nigel Green has delivered a blunt warning that the Fed’s latest meeting minutes released Wednesday signal that the odds of the US economy sinking into a recession continue to grow. Federal officials plan to remain aggressive in raising rates, agreeing that “cuts shouldn’t happen in 2023.”

“It appears that officials remain hawkish and are especially concerned about the tight labor market,” Green said. “We expect that the latest minutes will give the central bank further support to maintain interest rates higher for longer than had been previously priced in by the markets. With the labor market not cooling as fast, there seems to be a considerable turnaround in tone from the more dovish minutes in November.”

The minutes, he added, “dash yet more hopes for an economic soft landing.”

“The tone of the minutes indicates the Fed is not yet ready to pivot as the central bank believes risks for inflation remain to the upside, and they will keep tightening until more substantial progress is made on bringing it back closer to target. Inflation remains their primary concern, not risks to economic growth,” he said.

Lagged effect of rate hikes

Greg McBride, chief financial analyst of Bankrate.com, echoed Green’s concerns: “Despite a rapidly cooling housing market, inflation has shown no signs of letting up, the labor market is still strong, and the economy is resilient,” he said. “This forces the Fed to continue its aggressive approach to interest rates.

“Interest rates have increased at the fastest pace in 40 years, and the cumulative effect will slow the economy, perhaps significantly, in 2023. Mortgage rates have rocketed to 16-year highs, home equity lines of credit are the highest in 14 years, and car loan rates are at 11-year highs. Savers are seeing the best yields since 2009 – if they’re willing to shop around.

 “The lagged effect of all these interest rate hikes, coupled with the reverse wealth effect of declining stock and bond prices, means we could see a rapidly slowing economy in 2023. Unfortunately, the economy will slow much faster than inflation, so we’ll feel the pain well before we see any gain.”

Dampened demand for housing

While rates will likely continue to hover near record highs, the mortgage sector is hopeful that any interest rate increases in 2023 will be in the more typical 25 basis point increments, according to Marty Green, principal at Polunsky Beitel Green.

“In terms of the residential mortgage market activity, we have begun to see some modest improvement as the combination of home price reductions, increased inventory, and an improved interest rate environment have convinced some buyers to re-enter the market,” Green said. “But market activity is far below what was occurring earlier in 2023 as home affordability, the transition of the residential real estate market, and the fears of a recession continue to significantly dampen demand for housing.

“Interestingly, mortgage market participants are still optimistic that interest rates will actually fall in 2023. The question is whether the market is just being overly optimistic or whether the market actually has a better reading on inflation and the possible effects of a recession than the Federal Reserve does.”

How are you recession-proofing your business? Let us know in the comments below.