A soft landing is ‘no longer Chair Powell’s priority,’ economist says

UBS Chief U.S. Economist Jonathan Pingle joins Yahoo Finance to discuss the most recent Fed commentary, foreign exchange, the housing market, and the economic outlook.

Video Transcript

INES FERRE: And this all comes as the Atlanta Fed president, Raphael Bostic, says the Fed can bring down inflation without severely damaging the economy. Speaking on "Face the Nation," he signaled its commitment to the 2% target. Joining us now, UBS chief US economist Jonathan Pingle. Jonathan, thanks so much for joining us. And I'm just wondering if, after we heard Fed chairman last week, if the markets perhaps hadn't really believed what Fed chairman has been saying for months now. And is a soft landing completely out of the question now?

JONATHAN PINGLE: Well, first, thanks both for having me. You know, I don't think a soft landing is out of the question. But it certainly is no longer Chair Powell's priority. And if we went back to the July post-FOMC meeting press conference, he said quite specifically that they really did want a soft landing. At the press conference last week, not so much.

He-- it was actually quite remarkable. He was really willing to accept recession risk. He was very frank about it. Not even knowing, saying, if we would have a recession or how severe it would be, but that it was paramount to bring inflation back to the 2% objective. So I do think there was incremental news in how willing he was to admit that recession could be an outcome of the policy tightening and how he also argued that it could be necessary.

AKIKO FUJITA: Jonathan, as we look at what's happening in the currency markets today, help us connect the dots here in terms of why investors in the US are so concerned about what's playing out across the pond when you think about a global rising rate environment and what exactly the UK government has now proposed in this inflationary environment.

JONATHAN PINGLE: Yeah, I mean, the dollar's rise-- I mean, Chair Powell mentioned this in the press conference last week as one of the things that's going to potentially restrain US economic activity, too. But we've certainly seen a very pronounced move in the dollar, both due to the positive terms of trade for the US. And let's face it. If you plotted the US two-year yield, it's had a pretty impressive move over the course of the last year.

Now, I'm not sure how much anybody predicted the response-- the UK budget or the response. But I mean, clearly, that's adding to some of these fears of what's unfolded in currency markets. And, you know, this pressure on the dollar potentially weighing on-- you had mentioned the impact on earnings, but also potentially weighing on global economic activity, given its role in denominating a fair amount of global trade even outside of the US.

INES FERRE: And Jonathan, a lot of market observers are saying the Fed will keep raising rates until they break something. And it looks like there's many cracks around the world, abroad at least, especially as it comes to the US dollar and the damage that it's creating in other parts of the world. So my question is, will something break abroad first? And what could be what breaks here in the US eventually?

JONATHAN PINGLE: Well, we're certainly starting to see real restraint in the US, in particular, in housing markets, from the rising rates. Abroad, it is always tough to know what a rising rate environment could expose. I mean, certainly, in 1994, the initial rate hike by the Fed was relatively disruptive. But it also contributed to things like the peso crisis and Orange County going bankrupt as well.

So where we see those cracks emerge are really very difficult to forecast. But the one thing I would emphasize again from my earlier comments and about the takeaways from the FOMC meeting is, the Fed is moving very quickly into restrictive policy. They do want to slow the US economy. They are extremely focused on seeing it in the inflation data itself.

And they really have lost a lot of patience waiting for improvement and other signs that they can engineer a soft landing. And it was clear from Chair Powell's comments that they're increasingly accepting of the idea that they may cause a recession in order to wring the inflation out of the system.

AKIKO FUJITA: So, Jonathan, two follow-ups on that. I mean, what are we starting to see in that data? Are we starting to see some slowing in inflation? And also, what is the risk that the Fed is moving too aggressively, too soon?

JONATHAN PINGLE: Well, there are reasons to think that the inflation data might improve over the coming quarters. We have seen a meaningful improvement in supply chains. There's certainly in forward-looking rent data, you've seen some slowing even in the brisk pace of rent inflation. We're seeing evidence that wholesale used car prices are moving. I mean, there's a lot of evidence that the inflation data is going to improve in the coming quarters.

But the Fed now is raising rates so quickly that they're not really allowing time for that improvement to show up before they say, we'll really put in place a pretty restrictive policy. I mean, they're moving at 75 basis point increments. That's a little fast to see, can we evaluate in real-time the response of the real economy to those interest rates increases?

So they could have made a decision to go slower. But I think they've really lost patience with the inflation data. And now it's more about moving quickly into responsive territory. And that does entail, I think, increased risk of hard landing.

INES FERRE: And when could we see the impacts of sort of frontloading these rate hikes, if you will, if that's what the Fed is doing, as you're suggesting, in a way?

JONATHAN PINGLE: Well, we are seeing some of the impact of the frontloading. I mean, certainly, housing, residential investment, even commercial property have slowed materially. You're seeing it in equity market valuations. I mean, you're seeing the impact of the rate hikes.

And given, quote, unquote, "long and variable lags," you're likely to see the restraining effect of those rate increases intensify in the coming quarters. But I think you're already seeing an impact on the real economy. And I think Chair Powell acknowledged as much in his press conference last Wednesday. So he's not unaware of what's unfolding and the restraints that they're putting in place.