Pimco’s Tiffany Wilding warns of underpriced US recession risk
TL/DR –
Tiffany Wilding, an expert on the U.S. economy at Pimco, sees a 50% chance of a recession, stating that the market is underestimating this risk. Wilding suggests that while the U.S. economy demonstrated resilience in 2023, there is a high risk of a slowdown in 2024 as savings buffers that have supported demand are expected to return to pre-pandemic levels, and the effects of rate increases will be felt. Despite the increase in the deficit, Wilding believes the Federal Reserve has likely finished raising rates, and she predicts they won’t go down until they are confident that inflation is reduced to 2%, which will likely require lower growth and an increase in the unemployment rate.
Tiffany Wilding’s Economic Outlook at Pimco
Tiffany Wilding, Pimco’s leading U.S. economy expert, is surprised by the robust resilience of the U.S. economy this year. Despite many forecasting a recession, the downturn has not materialized. While Wilding warns it’s premature to proclaim a soft landing, she suggests a 50% chance of a recession and believes that the market is underestimating this risk.
2024 Economic Risk Factors
Wilding anticipates a high risk of economic slowdown in 2024. She predicts that savings buffers will revert to pre-pandemic levels, fiscal policy will become contractionary, and the effects of rate hikes will become evident. Contrary to the typical soft landing contributed by loosened monetary policy, central banks intend to maintain high rates for an extended duration.
Central Banks and Rate Cuts
From her California base, Wilding speculates that a crucial question for 2024 is whether central banks will initiate preemptive rate cuts. However, historical precedents don’t indicate this. Banks tend to wait until rising unemployment rates and economic contractions are evident before taking such steps to avoid a recession.
Pandemic Surpluses and Recession Risks
Wilding believes that the U.S.’s greater than expected fiscal response to the pandemic has buffered growth. However, these positive pandemic surpluses are diminishing, leaving the potential for tight monetary policy and increasing recession risks. She urges vigilance as markets appear complacent in the face of these risks.
On the Peak of Interest Rates
Wilding believes that it’s most likely that the Federal Reserve has concluded its rate hikes. Any future rate hikes will depend on the economy’s performance. If there’s no slowdown in growth, the Fed may raise rates. If the economy does slow due to tight monetary policy and financial conditions, she predicts a prolonged hold on rates until cutting them becomes necessary.
Recession Probability and Market Complacency
Historical data suggests a higher than normal probability of recession. The chances are almost even, like flipping a coin. Despite this, Wilding notes that markets are not fully pricing in recession risks, indicating a degree of complacency. She stresses the importance of acknowledging these risks and believes they are being underpriced.
Postponed Recession
Recession predictions have been constant, but a downturn has yet to occur. Wilding asserts this doesn’t mean it will never happen. The market isn’t pricing in the possibility of a recession, but she believes it’s a 50-50 chance.
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