We suspect that the real economy will be less sensitive to a rise in interest rates this time, which means that the Fed could have to move rates more-than-expected before policy gets restrictive. The strongest argument is that the household balance sheets are in a much better shape to sustain their level of spending as the massive injections of money and credit through both monetary and fiscal stimulus have changed household balance sheets dramatically.
Households in the US have accumulated more than USD 2.5 trillion in excess savings during the pandemic. This could mean households that are much more resilient to inflation and higher interest rates, since consumers can continue to spend by dipping into these savings. This also means that nominal spending will continue to be too strong.
Nobody knows how high rates will need to move to cool the economy. We suspect that it will take quite a lot, and that the monetary tightening will continue to be quite a challenge for policy makers and financial markets. Central banks are forced to choose between two undesirable outcomes: Tighten to control inflation at the cost of tipping the economy into a recession, or do not tighten and allow inflation to erode real growth.
Expect Fed hiking by 75bp in July, followed by 50bp in September and November, and then by 25bp in December, January and March, ending at 4.25% for the upper bound.- Nordea Strategists
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