- The Fed wants a recession to convince markets it's serious about bringing inflation down, BofA's chief economist Ethan Harris said.
- "They told us they want a weak economy. I think that's a very friendly way of saying you want a recession," Harris warned.
The Federal Reserve wants a recession and is desperate to convince markets it's serious about bringing inflation down, according to Bank of America's chief economist Ethan Harris.
"They are trying desperate to convince the markets they are serious here," Harris said in an interview with CNBC on Wednesday, pointing to the minutes from the Fed's December meeting. Central bankers reiterated their view that they would keep interest rates restrictive and continue hiking to 5.1% in 2023, though bond markets are pricing in a lower Fed funds rate, and stocks are still strong.
"Markets don't believe the Fed's serious about fighting inflation. I think they're wrong. I think the Fed will deliver more than the market is expecting," he said.
That echoes the views of other economists, who have warned that the central bank was unlikely to back down on its aggressive monetary tightening regime to prevent inflation running out of hand. Prices have barely cooled from a 41-year-high this summer, despite the fact that officials raised rates 425-basis-points last year to lower inflation.
Interest rates at this level risk tipping the economy into a recession, though the Fed could be willing to take that risk in order to drive their inflation fight home, Harris warned, especially since inflation indicators, like the labor market, are still running hot. And while inflation cooled to 7.1% in November, that's largely due to short-term variables, Harris said, and the Fed is focusing on long-term inflationary pressures.
"They told us they want a weak economy. I think that's a very friendly way of saying you want a recession," Harris warned. "The fact that the signals that a recession is coming isn't going to stop the Fed."
Harris said the Fed would continue hiking rates until they saw clearer evidence of a cooling job market and lower services inflation. He predicted central bankers would likely raise rates by at least another 75-basis-points, bringing the Fed funds rate target to 5%-5.25%.