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Markets are wrong about Fed pivot; Powell will keep raising rates, and a year-long recession will ensue - Danielle DiMartino Booth

Kitco News

Despite a poor performance over the year, stock markets have rallied recently, with the S&P 500 up by 8.8 percent over the last month. This is partly due to expectations that the Fed will pause with its tightening cycle, or pivot and start reducing rates early next year.

Danielle DiMartino Booth, Founder and CEO of Quill Intelligence, said that the markets are wrong, and that Jerome Powell has no intention of easing up on tightening. She also forecasts a prolonged recession.

“Even if the Fed does pause its rate hiking campaign, it will want to continue with quantitative tightening, and not ease anytime soon,” she said. “We’re going to remain in a recession… for at least four quarters.”

She was confident that the Fed would not pivot, adding “I will be the first to say I am wrong if we see a major Powell pivot. And it would be mea culpa and I will be slaughtered on Twitter. And I’m fine with that too.”

DiMartino Booth spoke with Michelle Makori, Editor-in-Chief and Lead Anchor at Kitco News.

No Fed pivot

The Federal Open Market Committee recently released its meeting minutes, in which it signaled a strong commitment to reducing inflation down to 2 percent per annum.

Despite this, markets have priced in a Fed pivot.

DiMartino Booth said that this is unlikely. She pointed out that Federal Reserve Chairman Jerome Powell does not want to be known as the next Arthur Burns, a former Fed Chairman who failed to tackle soaring inflation in the late 1970s.

“Powell himself recently said, ‘I don’t want to be the Second Coming of Arthur Burns,’ and Arthur Burns is of course the former Fed Chair who let inflation go wild on his watch and caused the country to have such economic weakness, for such a prolonged period of time, that Paul Volcker had to come in and tame it,” DiMartino Booth explained.

She suggested that even if the Fed were to pause its rate hikes, it could sell off assets in its balance sheet, causing a shrinkage in the money supply.

“There is the other form of tightening with the shrinking of the [Fed’s] balance sheet,” said DiMartino Booth. “I think that the Fed is treading lightly, but by the same token, I don’t know that investors are paying close enough attention to what I would call the specter of quantitative tightening.”

She added that she expects that the Fed’s asset sales will accelerate in the coming months.

A prolonged recession?

DiMartino Booth said that she expects a delayed stimulus package from Congress, following the November midterm elections.

“I don’t see any major form of stimulus going directly to U.S. households until maybe March or April of 2023,” she said. “After we have the new Congress sitting and in session, if the Republicans take the House, I don’t think stimulus measures are going to look anything like what they’ve looked like after the pandemic. That messages to me that if we’re already in a recession, and we’re not going to get major relief for the U.S. household sector, then we’re going to remain in a recession for longer than most people think… we might be coming out of it at this time next year, but I don’t foresee a recession being quick and neat.”

DiMartino Booth added that U.S. exports would be hurt from weakening demand in its trade partners.

“The rest of the world is in worse shape than the U.S.,” she said. “We know that China is in recession. We know Germany is in recession. You cannot act as if the United States is an island. It’s an exporting nation as well.”

To find out DiMartino Booth’s outlooks on the gold and housing markets, watch the video above.

Follow Michelle Makori on Twitter: @MichelleMakori

Follow Kitco News on Twitter: @KitcoNewsNOW

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