Traders work on the floor of the New York Stock Exchange during morning trading on May 17, 2023 in New York City.
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A U.S. recession may prevent a steep market downturn in the second half of 2023, according to Michael Yoshikami, founder and CEO of Destination Wealth Management.
U.S. consumer price inflation eased to 4.9% year-on-year in April, its lowest annual pace since April 2021. Markets took the new data from the Labor Department earlier this month as a sign that the Federal Reserve‘s efforts to curb inflation are finally bearing fruit.
The headline consumer price index has cooled significantly since its peak above 9% in June 2022, but remains well above the Fed’s 2% target. Core CPI, which excludes volatile food and energy prices, rose by 5.5% annually in April, amid a resilient economy and persistently tight labor market.
The Fed has consistently reiterated its commitment to fight inflation, but minutes from the last Federal Open Market Committee meeting showed officials were divided over where to go on interest rates. They eventually opted for another 25 basis point increase at the time, taking the target Fed funds rate to between 5% and 5.25%.
Chairman Jerome Powell hinted that a pause in the hiking cycle is likely at the FOMC’s June meeting, but some members still see the need for additional rises, while others anticipate a slowdown in growth will remove the need for further tightening. The central bank has lifted rates 10 times for a total of 5 percentage points since March 2022.
Despite this, the market is pricing cuts by the end of the year, according to CME Group’s FedWatch tool, which puts an almost 35% probability on the target rate ending the year in the 4.75-5% range.
By November 2024, the market is pricing a 24.5% probability — the top of the bell curve distribution — that the target rate is cut to the 2.75-3% range.
Speaking to CNBC’s “Squawk Box Europe” on Friday, Yoshikami said the only way that happens is in the event of a prolonged recession, which he said is unlikely without further policy tightening as falling oil prices further stimulate economic activity.
“This is going to sound crazy, but if we don’t go into slower economic growth in the United States and maybe even a shallow recession, that might be actually considered a negative because interest rates might not be cut or might even continue to go up if that’s the case. That’s the risk for the market,” he said.
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