While a slowdown is guaranteed, the odds of a recession currently stand below 50%. However, that balance could very quickly tip in the wrong direction, if the Fed hesitates to cut rates sooner rather than later.
Bets on lower rates coming soon were so prevalent prior to the Fed’s January meeting, which spurred Jerome Powell to caution that policymakers were unlikely to be in position to cut as of March. Now traders have not only removed March as a possibility, but have also started to price in that the Fed is going is going to make a mistake.
At the same time, an equally hot debate is raging that perhaps the next shift isn’t a cut at all.
Dilemma at the Fed: Hike or Hold?
In recent days, Former U.S Treasury Secretary Lawrence Summers voiced an interesting viewpoint that because of persistent inflationary pressures, there was a “meaningful” chance that the Fed’s next move on rates could be an increase.
“The worst thing you can do when the doctor prescribes you antibiotics is finish part of the course, feel better and give up on the antibiotics,” said Summers.
Even if another hike is too hard to countenance, some Fed watchers are floating a repeat of the late-1990s: only a brief course of rate reductions that sets the stage for increases later.
