Fed rate hikes will trigger a downturn of greater 'speed and magnitude' than the Great Recession: Economist
US recession will hit ‘everywhere all at once,’ Macro Mavens President Stephanie Pomboy says
As the Fed enters its final moments on its discussion over interest rates, economists on "Mornings with Maria" signaled that their verdict could trigger a recession like 2007-08, except at a greater "speed and magnitude."
"It's not going to be confined to real estate, it's not going to be confined to the banks, it's not going to be confined to corporate credit," Macro Mavens president Stephanie Pomboy told host Maria Bartiromo on Wednesday. "This is really like 2007, 2008 all over again, except I think it's going to [evolve] even faster than it did then because of the speed and magnitude of the Fed's rate hikes."
"There's a serious problem of the financial institutions because of the Fed policies, and also because of fiscal policy," former Reagan administration economist Art Laffer added. "I think there are a lot of cracks in the system, and I think we're just beginning the financial problems because you're going to see this pop up in all sorts of other areas because of leverage and because of a very sharp rise in interest rates."
Wednesday afternoon, Federal Reserve Chairman Jerome Powell will announce its latest rate hike decision. Expert economists have largely predicted a 25 basis point increase, but uncertainty surrounds the final outcome amid a banking crisis and persistent inflation.
FED COULD PUT U.S. ECONOMY IN ‘VERY DIRE SITUATION’ WITH RATE HIKE DECISION, EXPERT WARNS
Hiking interest rates could exacerbate instability within the financial system, but pausing risks allows inflation to become entrenched in the economy or roar back with a vengeance.
Pomboy expressed her expectation of a 25 basis point hike, but warned "ugly stuff" could be coming down the pike.
"I do expect we'll get 25, however," she noted, "I think that we're going to be looking at much more rapid rate cuts than the market has presently expected… Honestly, what we're seeing here is not just the banking sector issue. The everything bubble has now burst, and that's going to hit, as to quote the movie, everything everywhere all at once."
"This is really like 2007, 2008 all over again, except I think it's going to [evolve] even faster than it did then because of the speed and magnitude of the Fed's rate hikes."
While Laffer disagreed with The Bear Traps Report’s Larry McDonald’s forecast of pulling back on rate hikes by July 4, the policy expert reiterated Pomboy’s argument.
"The Fed shouldn't be determining interest rates. They should be following the markets, not leading the markets," Laffer said. "And this is what got us into all the problems we're in today and the use of credit facilities, the banks, Silicon Valley, all of that is a direct consequence of the Fed's aggressive action of trying to control markets rather than following markets, and it's a major mistake."
Pomboy anticipates the Fed to take a "dramatic U-turn" in policy as corporate credit and municipal markets become "a little dysfunctional."
"If you take an economy that's toting much more leverage than it was in 2008, and then you ratchet up rates in record fashion, you're going to create real dislocations with people who can't service debt at those higher interest rates. And that applies to an enormous swath of the economy," the Macro Mavens president explained.
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Laffer further criticized Fed action, claiming that responding to current crises is "no way to run monetary policy."
"What you want to do on monetary policy is do the best you can to ascertain a stable, valued currency over a long period of time. You shouldn't be in there responding to crises this day and the next day and the next. That's not the way you should do it," Laffer said. "Just stable prices over a long period of time, and let markets clear themselves."
FOX Business’ Megan Henney contributed to this report.