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- Inflation isn’t coming down without a recession, according to JPMorgan Asset Management’s Bob Michele.
- The bank’s chief investment officer said prices would only cool if the labor market weakens and predicted interest rates would top 6%.
- Rates that high are likely to spark a recession, Michele said, warning the Fed’s tightening would eventually “bite.”
Inflation isn’t coming down without a recession, and interest rates will continue to skyrocket, according to JPMorgan Asset Management’s chief investment officer Bob Michele.
“The equation is: inflation doesn’t come down until wages do. Wages don’t come down until unemployment rises. Unemployment doesn’t rise unless we are in a recession,” Michele said in an interview with Bloomberg on Tuesday.
He predicted that interest rates would ultimately reach 6%, up from 4.25%-4.50% now, though the market is only expecting rates to peak at 4.9% mid-year.
Rates that high will set off at least a mild recession, JPMorgan CEO Jamie Dimon warned last week, though he said his team was preparing for a more serious potential downturn.
“It is possible the Fed will not initially do enough because the labor market proved more resilient. This is one thing that can unravel the market, and it’s my biggest concern,” Michele said.
He added that the Fed has only had one rate-hiking cycle since 1988 that didn’t end in recession, and he doesn’t expect a soft-landing in 2023.
“The delayed and cumulative impact of all the tightening that we are seeing ultimately will bite,” he warned. “It’s incredibly aspirational to think we are going to get away with that.”
The Fed already raised rates 425 basis points last year to bring down sky-high inflation, a level that could easily overtighten the economy into a recession, experts warn. Markets are expecting another 25-basis-point hike to come in February.
Some market bulls believe recession risks will force the Fed to let up on its aggressive tightening efforts and begin cutting rates in 2023, which could spark a strong rally in stocks.
Central bankers have pointed to a hot labor market as a reason why they need to continue their aggressive monetary policy, even as inflation continues to decline. Consumer price growth cooled to 6.5% in December – down significantly from 41-year-highs – but new payrolls remained high and unemployment shrank last month, a sign that the economy needs more Fed tightening to get inflation in check.
Inflation is likely to remain sticky, Michele warned, predicting the Fed would likely pause its rate hiking cycle around March, but start raising interest rates again as a recession and high inflation grip the economy by the end of the year.
Other market commentators have also warned of prolonged inflationary pressures. Top economist Mohamed El-Erian said the economy was headed into a 1970s-style stagflationary crisis, due to ongoing supply-chain issues and price pressures shifting into the services side of the economy, which is less responsive to Fed policy.