US Fed must watch its step as economic recession risks loom

High interest rates will weigh on growth momentum, as the UK and EU economies are finding out

The inflation fight is not over, but the danger now is overcorrection – one wrong move by the Fed could tip the US economy into recession

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US Federal Reserve chairman Jerome Powell holds a press conference on September 20. The Fed’s assessment of the economy has been sound so far, but it cannot be complacent about the impact of high rates on growth and must also take into account risks such as political posturing in the run-up to the 2024 presidential election. Photo: AFP

Tai Hui

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management.

Published: 8:30pm, 29 Sep 2023

The latest round of central bank meetings in the US, UK and the euro zone all point to an end to interest rate rises. These central banks face similar conditions; inflation is moderating but is still some distance from their official targets. They should start to pay more attention to recession risks in the quarters ahead.

Economic growth momentum is slowing, especially in the manufacturing sector. The manufacturing purchasing manager indices (PMI) for the US, UK and euro zone are all below 50. This suggests the sector is facing contraction pressure. The service sector PMIs are also weak. Unsurprisingly, the high interest rate environment is starting to cool economies.

Given this backdrop, these three central banks are strongly indicating that the rate hike cycle is coming to an end. The futures market echoes this view. It is pricing in only a 20 per cent and 45 per cent chance of a 25-basis-point hike by the European Central Bank (ECB) and the Federal Reserve respectively by the end of the year.

The ECB raised its policy rate on September 14 by 25 basis points, to 4 per cent. It did hint that this could be the end of the cycle, as rates have reached a level that would contribute to bringing inflation back towards its 2 per cent target. The Bank of England surprised the market by leaves rates unchanged, partly due to the unexpectedly soft inflation data in August.