Nora Szentivanyi is joined by Bruce Kasman to discuss why the widely held that monetary policy is already restrictive may be wrong. Central banks have been downshifting the pace of rate hikes based on the view neutral real rates remains close to zero in developed markets. But dramatic changes to the cyclical backdrop following the pandemic shock, along with the erosion of policy credibility and higher risk premia in several EMs, point towards higher neutral policy rates. Absent a recession taking hold this year, we expect views about the appropriate level of policy rates to shift higher. But if the dramatic rate hikes (400bp in DM and nearly 500bp in EM) generate a recession then the neutral rate rise will be obscured for some time.

The path to the next recession is hard to tie down, but risks are skewed in the direction of this dynamic taking longer and requiring higher rates than markets expect. Incoming data suggest that the path may not incorporate any meaningful pause but instead reflect a gradual but sustained adjustment to lean against still-elevated inflation risks. In this scenario, central banks may not be intending to create a downturn—but that risk will increase as they continue to tighten monetary policy rates above what is currently priced in markets.

Speakers:

Bruce Kasman, Managing Director, Chief Economist

Nora Szentivanyi, Economic Research

This podcast was recorded on February 21, 2023.

This communication is provided for information purposes only. Institutional clients can view the related report at www.jpmm.com/research/content/GPS-4334724-0 for more information; please visit www.jpmm.com/research/disclosures for important disclosures. © 2023 JPMorgan Chase & Co. All rights reserved.