Powell AI

A frequent refrain in February of this year from bulls was the worry that the Federal Reserve was hell-bent on hiking the economy into a recession.

That was replaced by fears of a banking crisis.

Now the banking crisis is fading so the focus will pivot back to the Fed. However given the latest episode and the terminal Fed dot not sitting just 25 bps higher, is it safe to exclude the idea of a Fed-induced recession?

I think it's a reasonable argument. What would confirm it is a turn in inflation and I think that's inevitable with some of the year-over-year comps in energy coming up. Beyond that, it will depend on the Fed's reaction function and how they navigate once inflation falls back into the 3-4% range.

If you listen to them, they'll want to 'finish the job' of getting inflation back to 2% and that's noble but if the economy is stumbling and AI job-losses begin, then they might want to start a slow slide in rates down to the 2.5% long-term number they've highlighted.

As for the main question, it comes down to economic data but right now the economy is running solidly and the Fed is more-inclined to tread carefully. That dynamic could leave risk assets in a better position than they were prior to the bank runs. In FX, that has to be weighed against things like narrower spreads vs JPY but I still think it's bullish on net for risk FX.