The Fed now has no choice but to push the US into a 'hard landing' recession to pull inflation down, strategist says

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Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017.Reuters/Joshua Roberts
  • The Fed has no choice but to push the US into a recession, TD Securities strategist Pirya Misra said.

  • That's because strong data will force the central bank to remain aggressive and pull economic activity lower.

  • Misra predicted rates would reach 5.25-5.75% this year, and a downturn could hit the economy by midyear.

The Federal Reserve now has no choice but to push the US into a downturn in order to bring down inflation, according to TD Securities strategist Priya Misra.

In an interview with CNBC on Friday, Misra warned that the economy could tip into a downturn by mid-year due to the threat of rising interest rates. Already, central bankers have raised rates 450 basis-points over the last year to take down inflation, a move that threatens to overtighten the economy into a downturn, experts warn.

"I think the Fed has no choice but to engineer a hard landing," she warned. "I think the Fed is going to feel that pressure to continue to hike."

Data is likely to keep coming in hot because Fed rate hikes work with a lag, and it takes 12-18 months for the full effect of Fed tightening to be felt in the economy, Misra said. She estimated that rates had already reached a restrictive level in December, though central bankers have cited a still-hot economy as a reason why interest rates need to move higher.

Markets are expecting a 25-50 basis-point rate hike in March. Misra predicted central bankers would ultimately raise rates to 5.25%-5.75% this year – up at least 75 basis-points from the current target of 4.5%-4.75%. She added that officials weren't likely to pause or cut rates until prices start to near the Fed's 2% inflation target, which could take until the third or fourth quarter of 2023.

Other Wall Street commentators have warned of the Fed overtightening the economy as interest rates edge higher. BlackRock's investment chief Rick Rider said central bankers were willing to push the economy into recession after being too lax on inflation last year, and 75% of economists in a Bloomberg survey said they expected the Fed to spark a recession within the next two years.

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