According to JPMorgan strategist Mike Bell, the biggest threat to the markets is a possible recession that doesn’t occur, which would force Federal Reserve to remain hawkish.
Since March last year, the Fed has increased rates aggressively to combat inflation. The Fed has raised rates aggressively to combat rampant inflation since March of last year. However, markets are anticipating a recession due to the tight monetary policy.
Wall Street believes that the Fed is reversing its tightening campaign to counter an economic downturn, with the S&P 500 and Nasdaq Composite up almost 6% and 11% respectively.
However, if the US economy does not enter a recession, and wage growth is high, the Fed will not reduce rates as anticipated. Instead, the Fed will have to increase rates in the second half year and lift them higher than Wall Street currently expects, Bell said to Bloomberg TV.
He said, “Unfortunately,” that at that point you are back in a world where stocks and bonds would both go down together.
Bell stated that JPMorgan’s base case assumes that there will be a recession by 2023, which will allow wage pressures and the Fed to reduce rates in 2024.
He said, “My best guess would be that the Fed will bring rates down to around 2.5% by 2024.”
When Wednesday’s two-day policy meeting finishes, the Fed will likely announce its most recent rate increase in almost a year.
The fed funds rate would rise to 4.75%-5.00% if there is a 25-basis point rate increase this week and another similar one later in the year, which is widely expected.
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