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US in the jaws of severe price inflation shock; Fed may accept recession to tame inflation: Citi

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US in the jaws of severe price inflation shock; Fed may accept recession to tame inflation: Citi

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In an interview to CNBC-TV18, Nathan Sheets, Global Chief Economist, Citi, said that he sees a 25 percent chance of a recession in the US. He stressed that the Federal Reserve may even be willing to accept recession in a bid to tame inflation.

Nathan Sheets, Global Chief Economist, Citi, on Thursday, said that the US is in the jaws of a severe price inflation shock. While it has been building up for a while, it has only been aggravated further by a supply shock due to Russia’s invasion of Ukraine. Sheets explained that there are also rising concerns about the durability of spending.
"My judgment is that the United States is in the jaws of a very severe supply shock and what we are seeing is a significant inflation, and, frankly, significant upward pressures on inflation as well. At the same time, I think that there is rising concern in the market about the durability of spending and the durability of the economy, especially as the Fed launches into a hiking cycle," he said.
Sheets said that he sees a 25 percent chance of a recession in the US. He stressed that the Federal Reserve may even be willing to accept recession in a bid to tame inflation. Elaborating on it, he mentioned that Citi has raised its forecast for inflation by 1.3 percent this year.
"Over the last month or so, we have marked down our forecast for global growth by six-tenths of a percentage point and we have marked up our forecast for inflation for this year, by 1.3 percentage points. My sense is that the Fed is out to defeat inflation and that means they have got to absorb a recession. I think right now, implicitly, they are saying that they will do it," he said.
Sheets mentioned that the US Fed Chair Jerome Powell has left the door open with a 50 basis points rate hike in May. Sheets once again reiterated that between taming inflation and supporting growth, the Fed would be leaning towards fighting inflation.
"My reading here is that Jerome Powell and his colleagues, given this choice between inflation and supporting growth, it seems like they are signalling they are going to do what is necessary to fight inflation. I think Jerome Powell has very much left the door open - and some of his colleagues are prepared to walk through it, on a 50 basis points (bps) hike in May," Sheets said.
"I think the markets are now grappling with how many 50 basis point hikes might there be during the coming year? And could it be a series of 50 basis points hikes? I think that's one of the things you are seeing in the markets, as they seek to digest that," he explained.
Along with interest rate hikes, Sheets explained that the Fed’s goal would be to bring down the balance sheet to USD 6.5 trillion.
"The Fed has made clear that it will proceed with balance sheet reduction. My sense is that we will get an announcement in May; it's likely to start in June and then I think, it will gradually ramp up to a pace of about $75 billion a month. And then, we'll just kind of proceed at that pace for several years. And I think that the Fed’s goal is to get the balance sheet down probably somewhere around USD 6.5 trillion," he said.
Watch the video for the full interview.
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