A Hard Landing Recession Is 'Inevitable' For U.S. Economy, Says Morgan Stanley Chief Economist
1min read Morgan Stanley's chief U.S. economist Ellen Zentner recently warned that a hard landing is inevitable for the U.S. economy, and high-interest rates are to blame, despite market expectations that the Federal Reserve will loosen monetary policy this year.
In a recent interview, Zentner said that she expects the U.S. economy to avoid a recession this year as no data is supporting an impending economic downturn. However, she warned that a hard landing is ultimately unavoidable.
She referred to recent comments by JPMorgan CEO Jamie Dimon, who warned on Monday that the likelihood of the U.S. economy heading into a recession is greater than 50%. Dimon suggests this is due to several risks facing the U.S., including the Fed's tightening policy, geopolitical conflicts, and the risk of soaring interest rates.
Zentner said she agreed with Dimon's view that these impacts are cumulative over time, and the market has not yet seen all the tightening effects of monetary policy.
We will have a hard landing at some point. I guarantee you that. We're all wondering when that comes, she added.
Fed officials have raised interest rates by 525 basis points in 18 months to curb inflation, pushing borrowing costs in the economy to their highest level since 2001.
Economists have been warning that high-interest rates could trigger an economic recession as the financial environment becomes increasingly restrictive. The full impact of rate hikes may not have yet manifested, as rate hikes typically take around 18 months to fully affect the economy.
Some areas of the financial system are starting to show signs of stress. Moody's data shows that the corporate default rate soared to its highest level since the pandemic last year. According to Federal Reserve data, bank lending has been declining for three consecutive quarters. However, there are signs that the Fed will maintain high-interest rates as it emphasizes a close watch on inflation data.
Zentner predicts that inflation could accelerate again in the first quarter, pointing out that core inflation rose 3.9% last month. This re-acceleration could appear in the next Consumer Price Index (CPI) report.
We do expect inflation acceleration to be temporary, but that is an open question, she said.
Investors have been digesting a significant rate cut expected in 2024, but with hot inflation data, many forecasters have lowered their expectations. According to CME's FedWatch tool, the market currently anticipates only three rate cuts by the Fed by the end of this year, each reducing the rate by 25 basis points.