“To get nominal GDP (gross domestic product) in line and cool inflation, the Fed would have to raise interest rates by 350 basis points. That would cause a housing crash and so much that you couldn’t do battlefield triage. So, at this point, the Fed decision to stay hawkish is going to keep pressure on its Asian counterparts to speed up their monetary tightening as well because, with globalization, we’re all in the same bucket together.”
Talking to clients remind him that we’re in a hyper-volatile time. He defines recession as two quarters of negative growth, which we’ve already had, even though he said that President Joe Biden thinks the term should be redefined as the U.S. heads into its mid-term election this November with rising interest rates and inflation already at 9.1%.
Larson said the rate hikes are meant to cool the economy, but the job market is still robust and there’s still pressure on prices with demand exceeding supply. So, it takes time to see if the process needs to be accelerated, but Larson said its hawkish moves will cause a slowdown in the housing market and create excess inventories since people will decrease their consumption.
“We have a fiscal policy driven recession in front of us,” said Larson, citing Shopify’s recent 10% workforce cut. “But, on the other side, we’re seeing markets rallying, even with bad news. When the market does not go down on bad news that means it is bottoming.”
Larson expects the Feds to keep raising rates in September and “whether they slow down their cadence or not will be more politics than policy because they are going into a mid-term election cycle in November But, ultimately, the economy needs to cool. Unemployment needs to rise. Housing needs to correct.”
