If the Fed has been too ruthless with its rate increases this year as a way to fend off high inflation, there is one critical risk that most investors probably won’t take into account.
“This is the danger [of a recession in 2023], Mohamed El-Erian, Queen’s College, President of Cambridge University and Allianz Chancellor, said on Yahoo Finance Live. “We’ve never had a situation in the past where the Fed was really late [with rate hikes] And the Fed didn’t end up pushing the economy into recession – which is why we want to avoid that outcome.”
Market participants widely expect the Fed to raise interest rates three times this year, and to end its bond-buying program by March. But the timing of these interest rate increases could be delayed as hot inflation readings continue.
Investors saw eye-catching levels of inflation in 2021 as workers (in short supply) demanded higher wages, ports were clogged by the pandemic, housing prices soared, and gas prices soared.
In November, the Consumer Price Index (CPI) registered a growth of 6.8%. That was the fastest rate of inflation since 1982.
Bond director DoubleLine told Yahoo Finance Live this week that he expects headline inflation to reach 4% in 2021. The upcoming CPI reading could show major gains of 7%.
“I don’t think we’re going to go back to the old school of one-and-a-half to 2% inflation because it stuck around for a while. And so I think we’re going to have to deal with higher levels of inflation, and the front end of the bond curve tells you that if you look at break-even margins,” Jeff Sherman, chief investment officer of DoubleLine, said on Yahoo Finance Live.
Steady inflation – and subsequent actions from the Federal Reserve – have the likes of bond kings Jeffrey Gundlach and El-Arian raising the specter of a recession within the next 24 months. In turn, it could be a choppy path for investors in the future after the impressive 2021 year for the markets.
“Obviously, this paints a misleading picture of both the economy and the markets,” El-Erian added.
Brian Suzy It is a comprehensive editor and Announcer at Yahoo Finance. Follow Suzy on Twitter Tweet embed and on LinkedIn.
Follow Yahoo Finance on TwitterAnd Facebook social networking siteAnd InstagramAnd FlipboardAnd LinkedInAnd Youtube, And reddit