Recession risk is on the rise, and one prominent senator thinks the Federal Reserve and high levels of inflation would be to blame if the economy falls into a downturn.
"I would be more concerned [about a recession when the Fed begins lifting interest rates]," said Senator Mike Braun (R-IN) on Yahoo Finance Live. "When you unleash a firestorm of inflation like we haven't seen in decades, there is no easy medicine."
The Fed is widely expected to begin hiking interest rates in March amid surging prices for food, energy and shelter. Fed watchers at Goldman Sachs and Bank of America think the governing body could increase rates seven times this year to wrangle inflation in part triggered by demand spikes during the pandemic.
But, that aggressive move to control inflation could trigger an economic slowdown.
"The real 'pain' begins in 2023 when monetary policy goes from adding 0.6% to GDP to subtracting 0.3%, a nearly 1 percentage point swing. The negative impulse continues through 2024 and troughs in the middle of 2025, assuming no hikes beyond next year. While the drag on growth is material in 2023, it's probably not enough to put the U.S. economy in a recession," said Aneta Markowska, Jefferies chief financial economist.
Fund managers are at least thinking a "recession scare" could emerge in the stock market this year as the Fed moves on rates and geopolitical risks remain elevated.
"Upcoming recession scare best played via long bonds-short commodities," said the latest Bank of America fund manager survey.
On the positive side, fund managers don't expect a technical recession this year (12% of those surveyed see a recession) — rather they worry about one potentially hitting markets.
Added Braun, "So we haven't been here since the 1980s [with inflation]. We do know the tough medicine was higher interest rates. That would be a fiasco now with all the debt embedded into the economy, especially through government."