The Fed needs to follow through on hikes, low odds of recession – SocGen

The Federal Reserve hiked by 25bp in March from extraordinarily accommodative policies set during the unprecedented COVID-19 lockdown. Hikes are triggering recession concerns. Recessions remain part of the future landscape, but the immediate inflation risk is real, and the Fed has room to proceed with hikes and balance-sheet run-off in the coming months, economists at Société Générale report.

Fed hawkish but recession calls premature

“We change our call to a 50bp hike in May, now with even faster inflation trends. Energy prices soared from already high levels in March and the CPI to be released 12 April is expected to show headline inflation up more than 8% YoY. Fed officials may be pre-empting the next CPI release with more hawkish comments.”

“There is no doubt the Fed is moving faster to tighten policy. A 50bp hike, plus more hikes should lift the fed funds rate above 2% by year-end. The median outlook of Fed participants for the fed funds at the end of 2023 was 2.8%.”

“Minutes of the 15-16 March FOMC meeting offered guidance on balance sheet run-off. Now to make it official in May. The minutes confirmed that the pace of run-off will be faster, but otherwise the process will be the same as in the 2017-19 period.”

“We believe concerns on the business cycle are premature. The Fed’s rate guidance is not cause for near-term concern. Rather than the rate outlook alone, our bigger concern is the mix of rate hikes and balance sheet shrinkage. The combination of tightening efforts may push policy to be tighter than it seems just looking at rates alone.”