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With the Federal Reserve set to aggressively raise interest rates and tighten monetary policy as it scrambles to confront decades-high inflation, Wall Street experts are now warning that doing so too quickly could spark a sharp economic downturn, market turmoil and even the next recession.
Federal Reserve Chairman Jerome Powell speaks during his renomination hearing in January.
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Investors have become increasingly nervous about the Federal Reserve’s aggressive interest-rate-hiking cycle and reversal of pandemic-era stimulus programs—a prospect that now has many Wall Street experts sounding the alarm about the potential impact to markets and the economy.
Bank of America’s chief investment strategist, Michael Hartnett, warned in a note on Friday that “recession risks [are] rising,” as he sees a scenario in the next six months where “rates shock morphs into recession shock.”
Other prominent economists—from across the political spectrum—have also been warning of a recession within the next couple of years, with several putting the odds of a downturn at over 50%.
The central bank now has to play catch-up to fight inflation, which has proven to be worse than expected, putting the odds of a recession by the end of 2023 at over 50%, according to former Fed Gov. Lawrence Lindsey, who served in the George W. Bush Administration.
Ex-Treasury Secretary Lawrence Summers, meanwhile, put the chances of a near-term recession—within the next 30 months—at above 50% because “the Fed has allowed itself to get far further behind the curve” in battling inflation.
Minneapolis Fed President Neel Kashkari warned earlier this week that the central bank shouldn’t “overdo it” on rate hikes by raising them too fast or too far, as it would raise the risk of “slamming the brakes on the economy” and “putting the economy into recession.”