If the past is any indicator of future events, a recession in the USA is definitely in the cards. Whether Canada follows remains to be seen. BMO | inflation economy interestrates
, and by the rising possibility of a monetary overshoot, says Porter. Furthermore, the economist highlights how geopolitical factors are adding an “unwanted ingredient to the noxious mix,” with reference to President Biden’s comments on Taiwan and “Putin’s latest rattling of the nuclear sabres.”
“Alongside an aggressive upward revision in the dot plot and Chair Powell’s unwavering message, we have further cranked up our expectation on additional Fed rate hikes,” writes Porter. “Bluntly, it makes little sense to veer far from the Fed’s stated expectations at this time, since it appears policymakers have strapped on the blinders and will keep at it until inflation has convincingly cracked. And that will still take some time yet.
He highlights the inevitable reality that this aggressive series of rate hikes will take its toll on the US economy. “After all, we are now looking at a cumulative 450 basis points of tightening in the short space of under a year,” writes Porter. He highlights how, at the FOMC meeting just one year ago, the Fed was only talking about the possibility of beginning to taper QE.
This grim outlook, in addition to a further drop in oil prices last week to below $80 did little to halt the back-up in global yields, says Porter. He says that BMO is lifting its near-term assumption on 10-year-yields, with a test of the 4% level likely by the end of the year. Naturally, the unfortunate series of events in the US and the rise in oil prices will impact Canada, resulting in BMO downgrading its Canadian growth outlook.
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