The Federal Reserve’s efforts to boost the economy may be coming too late, according to Northwestern Mutual.
The financial services firm flagged the risk of a potential recession, even as the Fed looks poised to cut rates to keep the economy stimulated.
Markets are pricing in with certainty that the Fed will begin easing monetary policy in September, according to the CME FedWatch tool— but that may not prevent a recession, given the weakness in the economy, according to Brent Schutte, the firm’s chief investment officer.
“I think we all think because the Fed is cutting rates, that’s the magic elixir that’s going to allow us to avoid a recession,” Schutte said in an interview with CNBC on Tuesday, pegging the probability of a downturn at over 50%. “If you look at the past four recessions, the Fed has actually cut before the recession and still had one.”
Other strategists have noted that Fed rate cuts have typically preceded a recession. That’s because central bankers tend to ease policy when they see a significant weakening in the economy — but it’s difficult to stop economic conditions from weakening once a downward path starts, experts have said.
In a recent note, Schutte pointed to weakness in the US labor market, with hiring conditions looking significantly weaker than they did several years ago. The unemployment rate spiked to 4.3% in July — the highest level recorded since the pandemic. Meanwhile, the US government significantly downgraded job gains in the year leading up to the end of the first quarter, with the economy having added 818,000 fewer jobs in that timeframe than previously thought.
“Given that labor data is a lagging indicator, it raises the question of whether the Fed is already too late in drawing its line in the sand of maintaining the current employment picture,” Schutte wrote. “The Federal Open Markets Committee may be hamstrung when it comes to how far it can go in supporting the labor market,” he later added, pointing to ongoing signs of weakening, like cooling demand for labor in manufacturing.
An economic slowdown now looks more likely than a soft landing, Schutte said, though he noted that there were still some attractive areas in the market for investors.
“We believe these asset classes offer what we view as attractive risk-reward profiles whether the Fed is able to pull off the difficult feat of a soft landing or, as we believe is a more likely outcome, the economy eventually sinks under the cumulative weight of the Fed’s previous rate hikes,” he wrote.
Investors have been watching for signs of a potential recession for more than a year. In July, the economy had a 56% chance of tipping into a recession within the next 12 months, according to the latest projection from the New York Fed.
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