- Economist Francis Donald told Bloomberg TV that a sharper change of direction is in store for the Fed.
- A slowdown in the US labor market could result in a second consecutive quarter of negative growth at the end of the year.
- If that happens, central banks will have to ease more quickly than markets expect.
Economist Francis Donald told Bloomberg TV that markets are right to price in a change in Federal Reserve policy, but should be prepared for a sharper-than-expected rate-cutting cycle.
“What we don’t buy into is that this is a two-and-three-and-done situation, and this is a reduction in insurance benefits,” she said. “We think we are heading into a proper recession that will require an appropriate easing cycle.”
Futures markets are eyeing two 25 basis point interest rate cuts near the end of this year, reflecting renewed optimism among investors following weaker-than-expected April jobs data. This reflected the current outlook, allaying concerns that the Fed would need to keep interest rates high or raise them again.
But for Manulife Investment Management’s chief economist, such weakness should cause concern because it makes a recession even more likely.
“Almost everything in the labor market that explains where we are in the labor cycle is showing deterioration,” Donald said. “We are not saying this is a big crisis, we are saying that GDP will be negative in two quarters, Q3 and Q4, but it is possible that GDP will be negative in Q4 and Q1. There is also sex.”
He acknowledged that his team has been predicting a recession for some time, but that upcoming data reaffirms that a recession is much more likely than a re-acceleration. He said he is continuing.
This includes household and temporary employment statistics, consistent unemployment data, lower turnover rates, and employment declines in small and medium-sized businesses.
A depleted labor market also underpins the recession theory from veteran forecaster Daniel DiMartino Booth, who told Bloomberg on Monday that the U.S. is already in a recession. This is based on a metric that tracks the unemployment rate over a 12-month period.
As the U.S. economy slows, Donald expects current interest rate levels to become increasingly untenable, explaining why the Fed must change course quickly.
“The average time between the first rate hike and the impact on businesses and consumers is two years, so we’re never out of the period where rate hikes have a significant impact on the economy,” he said. “We are entering that era.”
He has previously noted that the Fed’s inability to cut rates early increases the risk of something breaking down in the near term.