Inflation has shown to be non-transitory, and the Federal Reserve is ready to strike. Raising interest rates — the US central bank’s principal tool for taming price inflation — and Fed Chairman Jerome Powell has been hesitant to reach for it, let alone wield it, until recently.
According to David Rosenberg, the Fed’s battle on inflation, which began Wednesday with the first of a planned series of interest-rate hikes, is expected to slay the U.S. inflation dragon but at a hefty cost.
Investors conditioned to easy cash and rapid gains in stocks, real estate, and other rate-sensitive assets understandably hope for, if not expect, the Fed to create a Goldilocks-style gentle landing for the US economy.
However, Rosenberg, the well-respected president, chief economist, and strategist of Toronto-based Rosenberg Research & Associates Inc., believes the Fed will beat inflation so hard that the US economy may enter a recession as soon as this summer.
In addition, Rosenberg already sees signs of a weakening economy, which he believes calls the Fed’s timing into doubt and bolsters his recession prediction — a cycle that may not conclude with just one recession.
Two severe recessions, in 1981 and 1982, were required for then-Fed Chairman Paul Volcker ― the patron saint of inflation fighters and Powell’s role model — to bury a decade’s worth of inflation and restore the US economy and stock market.
Increases in interest rates reduce demand, but when taken too far, they smash it.
The resultant recession is bad for home values, consumer discretionary stocks, and nice-to-have products and services, but beneficial for Treasury bonds and companies that make and sell consumer staples, health care and medicine, energy, food, and other necessities.
Investing in such circumstances is difficult and selective, but investors must accept the card they’ve been dealt. Rosenberg discussed his recession thesis and indicated where to put your money so you may profit from whatever cards Mr. Market flips over earlier this week in a phone conversation that has been edited for length and clarity.
Rosenberg’s economic and market prognosis is, predictably, unpopular at the moment. “Forewarned is forearmed,” he likes to emphasize.