The Federal Reserve’s interest-rate hikes are kicking in by slowing growth and cooling inflation, but also making a recession more of a threat, says Rob Waldner, Invesco’s chief fixed-income strategist and head of macro research.
“We are increasingly worried about a recessionary environment,” Waldner told MarketWatch late Wednesday, despite what Fed officials said earlier in the day about their forecast for a soft landing for the economy.
A key to the thinking at Invesco is that rising real yields look poised to soon eclipse U.S. growth, as inflation falls (see chart):
The Fed said Wednesday it expects the economy to slow from an estimated 2.1% growth rate in 2023 to 1.5% in 2024, but then speed up again.
Traders also appear to be growing more confident about a soft landing.
But Waldner still thinks rising rates could land the economy in a recession, albeit one that is not extreme.
“The same crowd wondering why rate hikes weren’t working last year are also going to be confused as to why rate hikes are working now,” Waldner said. “But with nominal GDP about to go below nominal rates, that’s when monetary policy starts to bite.”
Fed Chairman Jerome Powell said he “always thought a soft landing was a plausible outcome,” during a press briefing Wednesday after the Fed kept rates unchanged in a 5.25%-5.5% range, a 22-year high, but also signaled rates could stay higher for longer than had been anticipated.
Of note, Powell said he was monitoring rising real rates, and that ultimately, “factors that are outside of our control” could determine the fate of the economy. “This is why we are in a position to move carefully.”
To that end, Waldner thinks the Fed will pivot and cut rates sooner than the “dot plot” indicates.
For investors, with the 10-year Treasury yield
around 4.346% on Wednesday, near the highest in 16 years, Waldner recommends adding lower-risk, longer-duration bonds with a seven- to 10-year maturity, especially if the Fed is forced to cut rates.
“Now would be a very good time,” he said.