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With increasing anxiety about an impending financial downturn, a renowned Wall Street economist has raised alarms about a potential recession, which he believes might already be underway. He also conveyed doubts that the United States Federal Reserve would soon reduce the pace of their funds’ rate increases.

Gary Shilling, President of A. Gary Shilling & Co., reflecting on recent stock market dips, emphasized that investors are “finally beginning to take the Fed seriously”, rather than banking on the hope that the institution would come to Wall Street’s rescue. Shilling shared these views with David Lin during an interview on October 31.

Fed’s Reputation at Stake

Shilling, a seasoned investment advisor who previously served at the Federal Reserve Bank of San Francisco and held the position of Chief Economist at Merrill Lynch, clarified that the Federal Reserve was tardy in addressing inflation’s surge last year.

“They thought it was a short-term phenomenon (…), so they really didn’t start tightening until March. And interestingly enough, US inflation year-over-year didn’t peak until three months later in June, so the Fed was very late. And then, on top of that, there was this feeling of investors who said, ‘Well hey, the pattern here is that the Fed will bail out Wall Street.'”

Shilling highlighted that the Federal Reserve’s delayed response to last year’s inflation trends means they have significant credibility to regain. He cautioned that a swift reversal in policy now might further damage their reputation.

Recession on the Horizon

This backdrop leads Shilling to anticipate an unavoidable recession, commenting, “it’s pretty hard to see how you don’t get a recession out of this if we haven’t already started it.” He underscored that historically, when the Fed aggressively hikes rates, it has consistently signaled a recession.

Discussing the usual pattern of the Fed maintaining elevated rates for eight months to a year, Shilling hypothesizes that the Federal Reserve may only ease up on their rate hikes “when they are absolutely certain that they’ve killed inflation and killed it dead.” He added:

“When the Fed saw that they had done the recessionary deed, they backed off. I don’t think that’s going to happen at this time, so I rather suspect it will be well into next year before the Fed shifts toward ease, and they want to make sure they see concrete evidence that inflation is no longer an issue.”

Adding to these concerns, Mike McGlone, Senior Commodity Strategist at Bloomberg, recently drew parallels between the current economic landscape and the scenario before the 2008 Great Recession. He continues to forewarn about an imminent economic downturn, reported in September.

Watch the entire interview: