The Federal Reserve is at the beginning of what can only be described as a “very aggressive” tightening cycle and recession could be the outcome, says ING chief international economist James Knightley and BBH Global Currency Strategy head Win Thin.
Knightly says the move to tighten policy comes at exactly the same time as the shadow of recession hangs over markets, meaning that there is now concern about what lies ahead.
“With inflation above 8% and the unemployment rate below 4% the Federal Reserve is finally in policy tightening mode, just when the growth story is showing signs of wobbling and recession fears are on the rise,” Knightly explained. “With the Federal Reserve acknowledging that it needs to make monetary policy restrictive to get inflation under control, the surprise 1Q GDP contraction wasn’t helpful going into the May FOMC meeting.”
Win Thin, BBH Global Currency Strategy head forecasts a period of economic and market instability noting “We were surprised that he seemed to rule out a 75 bp hike as we believe the Fed should always keep all options open. Powell admitted that with regards to the 2% inflation target, ‘Yes, there may be some pain associated with getting back to that’. “Powell said that tightening policy isn’t going to be pleasant … He also said that it’s possible that the Fed moves policy to restrictive territory. Make no mistake, the Fed is in the early stages of what we believe will be a very aggressive tightening cycle.”
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