Last week, the U.S. central bank resorted to its biggest rate hike since 1994 to fight inflation, which, as per the Founder of NorthmanTrader, comes with its own set of risks.
Henrich’s remarks on CNBC’s ‘Worldwide Exchange’
This morning on CNBC’s “Worldwide Exchange”, Sven Henrich warned aggressively raising rates does more to push the U.S. economy into a recession than it does to address inflation. Explaining why, he said:
Fed has admitted that rates hike will not do anything to deal with inflation in food, rent, and energy prices. It’s completely out of their control. So, the risk is that rate hikes will slow down the economy so fast that we’ll enter a larger recession.
The U.S. economy shrank at an annualised pace of 1.4% in the first quarter of 2022. Another quarter of negative GDP will check the technical definition of a recession.
Focus on the 10-year to identify a market bottom
S&P 500 bounced back in recent days but Henrich sees it unlikely that the upside will sustain unless the 10-year start to come back down. He noted:
Markets need lower yields, otherwise, we definitely will have a rollover. If yields go to near what the Fed Funds Rate implies, which is 3.8%, then I think everything will roll over and we head into a bigger recession.
Last week, Seema Shah (Senior Investment Strategist at Principal Global Investors) also warned the benchmark index could return to its pre-pandemic levels.
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