- Banking
- Wealth
- Privileges
- NRI Banking
- Treasures Private Client
- The Fed is keen to underscore that its responsibility to deliver price stability is unconditional
- We expect below-trend growth and no Fed easing through 2023
- Global growth will likely slow by 300bps this year
- A non-trivial risk scenario is that the Fed hikes past 4% and a global recession ensues…
- …accompanied by sovereign and corporate sector stress, and sharp financial market correction
Related Insights
Commentary: Central bank resolve and the global economy
“Reducing inflation is likely to require a sustained period of below-trend growth.”
— Fed Chair Powell, Jackson Hole Symposium, August 26, 2022
The annual Jackson Hole Symposium is typically used by academics and Fed officials to explore broad topics such as the structure of the economy and the challenges of conducting monetary policy under uncertainty. But last Friday’s remarks by Fed Chair Powell were striking for their narrow and direct focus on the near term. The short and blunt speech resulted in the US equity markets selling off by 3-4%.
The speech was aimed at underscoring the Fed’s resolve in moving its policy stance to a level that will be sufficiently restrictive to return inflation to 2%. This is a tall order, as evidenced by the still-strong labour markets and substantial underlying inflation pressures, and would likely require maintaining a rather tight monetary policy stance through 2023, a view that we have expressed for long. As the Fed Chair warned in his remarks that historical record cautions strongly against prematurely loosening policy, the fixed income market, during Friday’s trading hours, gave up on its bet that there would be rate cuts next year.
The Fed recognises that a lot of global inflation in the cycle is from the supply side, but it is also keen to remind the markets and economy observers that its responsibility to deliver price stability is unconditional. Moreover, it is well understood by now that on top of supply side factors, a chunk of current US inflation is the product of strong demand, which can be dealt with by the various tools at the Fed’s disposal.
Chair Powell’s bottom-line was clear; the Fed will work hard to keep inflation expectations stable, and if that requires slowing down the economy substantially by raising rates to well above the neutral rate and keeping conditions sufficiently restrictive for all of 2023, so be it.
Our global real GDP growth proxy estimates suggest an-already slowing growth environment, slowing from 6%+ last year to just over 3% this year, and another year of around 3% growth to come. Europe and the US will likely see less than 1.5% growth next year, even as China recovers from its Covid slump. Asean-5 economies, lagging the developed markets with pandemic-transition, will enjoy some rebound momentum this year, but that too will likely falter next year.
So far, this discussion has revolved around a baseline scenario under which (i) inflation eases next year, but not enough to warrant policy rate accommodation and (ii) growth slows around the world but with no recession. The risk case is that rates may well go higher (Fed Funds rate of 4%+), precipitating much lower growth and a particularly sharp sell-off in global asset prices. Further exacerbation of the situation in Ukraine, or a major skirmish between the US and China could compound this scenario.
Consequent stress points would span the DM and EM, in our view. Those with high leverage, sovereigns and companies alike, would likely struggle. Margins would come under pressure, driving down profits, credit risks would spike, and capital flows would turn volatile again. With little fiscal room available to offset the tightening monetary conditions, the global economy could be in for a rough ride next year.
To read the full report, click here to Download the PDF.
Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.
Topic
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.