Written by: George Prior
US CPI data is likely to show on Wednesday that inflation has peaked and the Federal Reserve must stop interest rate hikes from next month, warns the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organizations.
The warning from deVere Group’s Nigel Green comes as global financial markets await the latest US inflation report for March due out at 8.30 am Eastern Time. Economists forecast it rose 5.6% from a year earlier, excluding food and energy prices, which is approximately the same as the previous month.
He says: “Monetary policy is heavily driven by this data. Investors around the world will be treading water until it’s published as the CPI will give signals about how the Federal Reserve will set interest rates in the world’s largest economy at their next meeting on May 3.
“March’s headline inflation is expected to come in at 5.2%, a slowdown from February’s 6% annual gain. Core inflation, which strips out energy and food, is forecast to ease slightly month-over-month.
“This would suggest that inflation has peaked, being the slowest annual increase in consumer prices since May 2021.
“However, it is not going to be enough for the Fed and we fully expect the FOMC (Federal Open Market Committee) - the branch of the Federal Reserve responsible for implementing monetary policy – will set a quarter point interest rate hike in May.”
But the deVere CEO says he is worried about further rate hikes, citing two main reasons.
“Investors are increasingly concerned that the Fed’s overtightening now – when monetary policy time lags are notoriously long – could steer the US economy into a recession,” he notes.
“The time lag in monetary policies is very high. Economists estimate interest rate changes take up to 18 months to have the full effect. This means monetary policymakers need to try and predict the state of the economy for up to 18 months ahead.
“With inflation seemingly having peaked, the Fed is slowing winning the battle and officials now need to take their foot of the brake.”
He continues: “The Fed must also heed the warnings of the inverted US Treasury yield curve, which is now in day 193. I cannot stress this enough.
“The inverted yield curve suggests a recession is looming because it’s a sign of a tight credit market and weak economic growth.
“The inversion of the yield curve has preceded most US recessions since 1950.”
Should the US, the world’s biggest economy, fall into a recession, it would “clearly have a global impact” says Nigel Green. “At a time when the IMF is saying that five years from now, global growth is expected to be around 3%, which is the lowest medium-term forecast in a World Economic Outlook for over 30 years.”
The world economy is “not currently expected to return over the medium term to the rates of growth that prevailed before the pandemic,” the fund said in its latest economic outlook on Tuesday.
The slower growth prospects come from the increasing living standards in economies such as China and South Korea, weaker global labor force growth and geopolitical issues, such as Brexit and Russia’s invasion of Ukraine, the IMF said.
The deVere CEO concludes: “It’s time for the Fed to pivot. Will it? I doubt it.”
Related: Investors Must ‘Buckle up’ as Stocks and Bond Markets Send Opposing Messages