Amid growing concerns about the looming financial crisis, one of Wall Street’s top economists has warned about the strong possibility of a recession that may have even already started, arguing that the United States Federal Reserve may not ease the funds’ rate hiking any time soon.
Indeed, commenting on the declines of major stock indices, economist Gary Shilling, the President of A. Gary Shilling & Co. stressed that the investors are “finally beginning to take the Fed seriously” instead of thinking it would bail out Wall Street, as he told David Lin in an interview streamed on October 31.
Fed’s credibility on the line
As the investment advisor, who had also served on the staff of the Federal Reserve Bank of San Francisco and was the first Chief Economist of Merrill Lynch, the investment and wealth management division of Bank of America (NYSE: BAC), explained, the Fed was “slow to recognize the strength of inflation” early last year.
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“They thought it was a short-term phenomenon (…), so they really didn’t start tightening until March. And interestingly enough, US inflation year-over-year didn’t peak until three months later in June, so the Fed was very late. And then, on top of that, there was this feeling of investors who said, ‘Well hey, the pattern here is that the Fed will bail out Wall Street.’”
However, Shilling said that “the Fed really had a lot of credibility catching up” due to being slow to react to inflation last year, which is why he believes that “for them to reverse gears at this time, that would really destroy their credibility and they have to start all over from even further behind the eightball.”
For this reason, the economist believes that “it’s pretty hard to see how you don’t get a recession out of this if we haven’t already started it” and “when the Fed is really going out hot and heavy in terms of raising rates (…), that has been an absolutely faithful forecast of recessions. (…) It has never missed.”
Asked to comment on the Fed keeping rates elevated between eight months to a year on average, Shilling shared his projection that the Fed might start easing on the rate hikes only until it is absolutely certain that they’ve killed inflation and killed it dead.” In other words:
“When the Fed saw that they had done the recessionary deed, they backed off. I don’t think that’s going to happen at this time, so I rather suspect it will be well into next year before the Fed shifts toward ease, and they want to make sure they see concrete evidence that inflation is no longer an issue.”
Meanwhile, Mike McGlone, the senior commodity strategist at Bloomberg, recently pointed out the similarities in chart patterns between the current economic situation and that prior to the Great Recession in 2008, while he repeated his warnings of an upcoming economic crash, as Finbold reported in late September.
Watch the entire interview below:
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