Economist says U.S. equities may continue to struggle despite peaking of inflation

Photo taken on March 24, 2020 shows the New York Stock Exchange and George Washington statue on Wall Street in New York, the United States. (Xinhua/Wang Ying)

If inflation keeps moving in the right direction, the Federal Reserve doesn't have to be as aggressive, economist Ray Farris said.

NEW YORK, Nov. 21 (Xinhua) -- U.S. equities may continue to struggle in the next six months though inflation in the United States has peaked, according to a senior economist and investment strategist with Credit Suisse.

With the peaking of inflation, the equity and bond investment returns historically tend to improve, said Ray Farris, chief economist and chief investment officer for the Americas, Credit Suisse.

Overall, U.S. headline inflation peaked in June and the inflation data for October made it almost certain that even the core inflation has peaked, said Farris in a recent interview with Xinhua on the sidelines of The Chinese Finance Association 28th Annual Conference.

The year-on-year growth of U.S. headline consumer price index (CPI) eased to 7.7 percent in October from 9.1 percent in June while core CPI fell to 6.3 percent in October from 6.7 percent in the previous month, according to data issued by the U.S. Bureau of Labor Statistics.

However, "it's not so clear that improvement in returns will come quickly. It could take longer," said Farris.

"The reason that equities may struggle over the next 6 months is that the Fed is still raising rates, growth is slowing and the risk of recession is going to remain very high," Farris told Xinhua.

For equities to find a bottom and then trend higher, "you need to get to the stage where you know that's it the worst for the economy is over and the Fed stops hiking rates and could cut... It hasn't happened yet," Farris added.

The outlook is probably better, sooner for bonds than it is for equities, according to Farris.

If inflation keeps moving in the right direction, the Federal Reserve doesn't have to be as aggressive, according to the economist.

"If the November CPI data are also pretty good, then maybe the Fed stops at 4.75 percent," Farris said.

The Fed has raised the target range for the federal funds rate to 3.75 percent to 4 percent and a few Fed officials have recently indicated the terminal rate needs to rise above 5 percent to tame inflation.

Farris expected that the United States would continue to have some economic growth though there is a high risk of recession.

Now, the balance in the U.S. labor market is "very fine" as high-profile job cuts by big tech companies are offset by continuous hiring by hotels, airlines, oil companies, trucking operators, medical service providers and others, according to Farris.

Inflation is ultimately a policy choice and if the Federal Reserve chooses to be committed to a target of 2 percent, it can achieve that target, said Farris.

What the change in the structural balance background including less globalization, less supply of energy, deterioration in demographics means for the central bank is "that in order to achieve its inflation objective, the trend rate of growth is going to be lower," Farris said.

"If I'm committed to an inflation objective, I can achieve that inflation objective," Farris added. "But, I may have to accept less growth than in the past or than I desire... There's a trade off."

The Federal Reserve needs to rapidly bring inflation down and then lower interest rates as the financing demand from U.S. corporations is expected to rebound in 2024 and 2025, according to Farris.

"The risk for the Fed and the system is that interest rates have to remain high into 2024 and 2025, which is another reason why it is important that the Fed rapidly brings inflation down," Farris said.

Statistics show that the S&P Index is still more than 17 percent lower than that at the end of 2021 despite the rise since mid-October.