- Prepare for a more forceful "Old-Testament style" central bank reaction to stubborn inflation, JPMorgan economists say.
- "The risk of triggering a more wrathful Old-Testament style central bank reaction is on the rise," they said in a note.
Brace for more forceful policy action from developed-market central banks to stamp out inflation, according to JPMorgan.
In a recent note, economists at the bank highlighted that monetary policymakers have recently slowed the pace of interest-rate hikes, seeking to balance their campaign to lower inflation with efforts to avoid a severe economic downturn.
However, such a "gentle and forgiving path will prove unsuccessful" as economic resilience and supply chain disruptions caused by COVID-19 keep inflation stubbornly high, Bruce Kasman, Joseph Lupton and Michael Hanson said.
"The risk of triggering a more wrathful Old-Testament style central bank reaction is on the rise. The transmission of the rapid shift in policy still underway also raises the risk of a recession not intended by central banks," they added.
The Federal Reserve recently eased the pace of its rate hikes, with inflation moderating from 40-year highs reached last summer to 6.4% in January - which is still way above the 2% official target.The US central bank raised rates by 25 basis points this month, after previous increases of 50 and 75 basis points.
JPMorgan economists described the less aggressive rate policy as "embodying a New Testament-style grace toward the world's inflation sins," that have "been a correction from inappropriately accommodative stances rather than an attempt to smite out the expansion."
But recent data - including strong labor-market figures and a surge in retail sales in January - has suggested that the central banks may need to do more to rein in inflation.
The JPMorgan economists see a 70% chance of a recession in late 2023 or 2024. Possible scenarios projected by the analysts include the Fed ending rate hikes next quarter, with its cumulative rate hikes of about 500 basis points since early 2022 leading to a US-concentrated recession later this year.
Another scenario entails the Fed and other central banks turning more aggressive in response to resilient growth and elevated inflation, which "becomes a recipe for a deeper recession that starts later," they added.