With markets expecting the Federal Reserve to hike interest rates nine or 10 times before early 2023, global market analysts predict three key consequences, according to CNBC.
First is the fear of a global recession. “The Fed, to a certain extent, is the world’s central banker,” Kristina Hooper, global market strategist at Invesco, told CNBC. With the U.S. consumer price index the highest it’s been since 1981, and the Fed’s recent 75 basis point hike, some are worrying that a likely U.S. economic slowdown may reverberate worldwide. Hooper said the “soft landing” she and many are hoping for may be hard to achieve.
“Admittedly, slowing just enough to cool inflation but not cause a recession is an extremely delicate balancing act given that monetary policy is a blunt instrument, not a surgical tool,” said Hooper.
Second, the European Central Bank could increase fragmentation in European sovereign bond markets, Stéphane Monier, chief investment officer at Banque Lombard Odier, told CNBC.
Also, the Fed’s hawkish shift could have currency implications that could influence European policymakers, Carsten Brzeski, global head of macro at Dutch bank ING, told CNBC.
“It clearly means that we could see a stronger dollar and therefore a weaker euro, which had already been a concern for several ECB officials. If we were ready to move towards parity, I think the weaker euro—even if this is not a target for the ECB—adds to the inflationary pressure, and therefore is a concern,” said Brzeski.
Third, a profit recession, when profits fall for at least two consecutive quarters, may be coming, according to Guy Stear, head of emerging markets and credit research at Société Générale. For 25 years, profits have increased as a percentage of GDP, but with deglobalization, higher energy and input costs, and higher wages, said Stear, rising profits may be a thing of the past.
Add supply chain and cost issues caused by Russia’s invasion of Ukraine, along with other geopolitical problems, and a profit recession is likely, said Stear.
