Mixed data have painted a muddled picture of macroeconomic conditions in recent months, though a recession remains the most likely outcome of the rapid tightening of monetary policy and late-stage business cycle dynamics, according to Fannie Mae’s Economic and Strategic Research (ESR) Group. Lessons learned from the inflationary era of 1970-80s lead ESR to expect that Federal Reserve will maintain its restrictive monetary policy stance until it is “abundantly clear” that labor market inflation pressures have eased. However, this evidence may not appear until a recession is already unavoidable.
Chief economist Doug Duncan noted: “Core inflation remains sticky, having not fallen as rapidly as other price measures; creating upside risk to federal funds rate – as noted in Fed’s Summary of Economic Projections – making it likely that they maintain restrictive posture for longer than most market participants initially anticipated.” Overall, Fannie Mae sees recession as “most likely” outcome amid mixed economic data.
