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(Kitco News) With the U.S. slipping into a recession almost done deal, the Federal Reserve might be forced to respond with a rate cut as early as September, according to JPMorgan Asset Management.
There is a widening gap between market rate cut expectations and hawkish comments by Fed officials. And that is leaving many investors confused.
"The market is right to be penciling in cuts," Bloomberg quoted JPMorgan Asset Management's portfolio manager Seamus Mac Gorain as saying. "Inflation is too high, and it will take a recession to bring it back down."
On top of that, U.S. banking turmoil will only make "a recession more likely," Mac Gorain added, noting that he prefers Treasuries.
The need to cut could come as soon as September, he said.
This view contradicts the Fed's well-established rhetoric that rate cuts are off the table.
And even though Fed Chair Jerome Powell hinted at a rate pause in June, many Fed officials remain hawkish, with the dominant theme being for rates to remain 'higher for longer.'
Dallas Fed President Lorie Logan said Wednesday that "smaller, less frequent" rate hikes could be beneficial for the Fed to ensure financial stability.
"Gradual policy adjustments can be helpful," Logan said at an Atlanta Fed economic conference. "Financial conditions can sometimes deteriorate nonlinearly, doing damage to the broader economy, but the risk of a nonlinear reaction can be mitigated by raising interest rates in smaller, less frequent steps."
Richmond Federal Reserve President Thomas Barkin told Bloomberg Tuesday that he was "comfortable" seeing rates rise further.
"I think the message sent in the last statement was one of optionality, it wasn't one of a pause or a peak," Barkin said. "I want to learn more about what's happening with all these lagged effects (from earlier rate hikes), but I also want to reduce inflation. And if more increases are what's necessary to do that, I'm comfortable doing that."
Last week, New York Federal Reserve President John Williams said it was too soon to tell whether the Fed is done raising rates.
"We haven't said we are done raising rates," Williams said at an Economic Club of New York gathering. "We've made incredible progress … [but] if additional policy firming is appropriate, we'll do that."
A recent Reuters poll also revealed that despite recession calls, the Fed would keep rates unchanged for the rest of this year.
In terms of the looming debt ceiling risk, Mac Gorain still expects another episode of market stress before the issue is resolved. He is not ruling out a similar type of volatility as in 2011.
"It's hard to say exactly when that will happen, whether it will be in the next few weeks or whether it might be a little bit later in the summer," he said.
