MNI INTERVIEW: Concern Over US Hard-Landing- Ex-BOJ’s Kameda

The U.S. economy could still see a hard-landing as the Federal Reserve was late in acting to raise interest rates, a former Bank of Japan chief economist told MNI in an interview, warning also the outlook for the global economy is likely to deteriorate further from here.

“The U.S. labor market was tight even before the Fed started to raise rates,” Seisaku Kameda, now Executive Economist at Sompo Institute Plus, the research arm of the insurance giant, pointed out. ”If the Fed is committed to taming inflationary pressure, a sizeable economic downturn cannot be avoided, although an outright recession is not necessarily a given.”

He thought that the Fed had no choice but to maintain its stance of fighting high inflation as the U.S. President Joe Biden has made it a top priority ahead of the midterm elections in November.

Kameda also believed that central bank credibility was also at stake: “The Fed must make it clear that the bank is fighting the high inflation rate as there is a risk that the medium and long-term expected inflation rate become uncontrollable and policymakers lose confidence as inflation-fighters.” (See MNI INTERVIEW: Kohn Sees Upside Risks To Fed Funds Rate Peak)

CHOPPY RELATIONSHIP

He said he thought that the Fed’s communication policy with financial markets had been somewhat disjointed and there was no consensus between policymakers and the markets with regard to the landing spot for Fed rate hikes.

Market views on the outlook for Fed’s rate hikes fluctuated sharply based on strong or weak economic data, and dovish or hawkish remarks by Fed officials, and these volatile market moves would continue for the time being, Kameda warned.

“Looking ahead, the U.S. headline inflation rate will peak eventually and the outlook for final Fed’s rate hikes and for policy next year, including rate cuts, will become clearer. If such a view comes in sight, the Fed’s communication and market’s understanding will converge,” he anticipated.