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Fed-induced recession ‘likely to be more mild in nature’: Economist

Vanguard Senior International Economist Andrew Patterson joins Yahoo Finance Live to discuss FOMC meeting expectations, recessionary risks, a 75-basis-point rate hike, and the outlook for the economy.

Video Transcript

[AUDIO LOGO]

JULIE HYMAN: For more on all of this, let's welcome in Vanguard senior international economist Andrew Patterson to talk about some of the backdrop that we are looking at for all of this action. So Andrew, as we look ahead to the Fed tomorrow, I'm curious-- you know, everybody talks about the press conference and the language and trying to read ahead to what the terminal rate might be. What are you going to be listening for specifically from the Fed chair?

ANDREW PATTERSON: So really tomorrow seems like 75 basis points is pretty baked in. There's some discussion around 100. But if they do go 100 tomorrow as a result of an inflation surprise or a higher CPI print, what do they have left to do if there's another one, right? They've acknowledged for a while that this is going to be a bumpy ride, as they continue to bring inflation down.

But tomorrow, we'd expect them to really emphasize-- not necessarily the terminal rate. They're not going to give you much clarity around that. They may hint at it. But really, how long they're going to keep rates at that terminal rate? So how long they're going to keep rates high.

Because terminal doesn't mean you have to start cutting, it just means you've stopped raising rates. So maybe putting some emphasis around that could be a signal to the market that, you know, just how much emphasis they're putting on combating inflation and how long they're willing to stay at those higher rate levels.

BRAD SMITH: OK, and so you mentioned that at this altitude we'll still be incurring some of a bumpy ride or should be expecting that. But should we also be expecting a soft landing at the end of that bumpy ride?

ANDREW PATTERSON: So again, in trying to predict that, we tend to think about it in terms of scenarios. We were thinking that the probability of the soft landing scenario was increasing a bit. So call it around 20ish% from around 15% earlier in the summer.

That may have changed a bit with the inflation print. But again, that was just one CPI report. And one report does not make a trend. So you know, much like the Fed emphasizes, we do want to remain data dependent on that.

Right now, a soft landing is not our base-case scenario. We would define that as being able to avoid a recession. We do believe that sometime in 2023, there's likely to be a recession, one called by the NBER at least, for at least a period of time. In terms of magnitude though, we don't think we're thinking about anything like 2009 or 2020. Likely, at this point, again, based on the data likely to be somewhat more mild in nature.

JULIE HYMAN: Andrew, we talked to a guest earlier who said the terminal rate could be more like 5%, instead of the say 4% that the market might be pricing in. Does that sound reasonable to you? And I mean, does 5% still comport with the scenario that you're just painting, where we would not see a major pullback in the economy?

ANDREW PATTERSON: So as of right now, we're not ready to move to a 5% terminal. We'd have it a little bit between 4% and 5%, probably closer to 4 and 1/2%. Again, remaining data dependent there. Certainly, if it started to look as if the Fed were going to have to go to 5% and stay there for some time, the probability of a soft landing diminishes and the probability of a recession increases, along with the likely depth of that recession.