Will the Federal Reserve Go Too Far?

What if its tightening program squelches a now-imperiled economic recovery? Natixis’ Lavorgna wonders.

When Federal Reserve Chairman Jerome Powell gives his news briefing this afternoon, he may lay the groundwork for a ruinously harsh escalation of interest rates, at a time when the U.S. economy is looking shaky. That’s the fear of Joseph Lavorgna, Natixis’ chief economist, Americas.

“We are concerned that Chair Powell will err on the side of hawkishness” at the close of the Fed policymaking panel’s January meeting, the economist wrote in a research note.

Wall Street widely expects the central bank to begin hiking its benchmark federal funds rate at its March session, with four quarter-point boosts coming this year, up from a level near zero now. (No February meeting is slated.) The Fed also may accelerate the phase-out of its bond-buying campaign, which has been another tool to bolster the economy.

Lavorgna views with alarm some signals that the nation’s economy might be weakening: a slowing in payroll growth and a dip in the The Atlanta Fed’s GDPNow™ survey for last year’s fourth quarter was down to a 5.1% increase in gross domestic product (GDP), from 10% previously, he pointed out.

“The economy is slowing rapidly,” Lavorgna wrote, “but we fear that the Fed will attribute it mainly to the Omicron variant,” which appears to be receding. Such a perception would be misguided and dangerous, he indicated.

If the degree of January’s reduced economic activity is sustained, he warned, then “it points to real GDP growth around zero.”

To be sure, there are any number of lowered economic estimates, with Goldman Sachs a prominent pessimist—its outlook is for just 3.4% growth. The explosion in inflation lately, along with the latest coronavirus strain, has put many people in a sour mood, which may weigh on their spending and other decisions.

The stock market’s January downdraft is evidence of that negative mindset: The S&P 500 is off 8.6% thus far this year.

Various Wall Street strategists have opined that the stock market’s decline stems in part from fear that the Fed will overreact to inflation and deprive the economy of the fuel it needs to power ahead.

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