Fidelity’s Salman Ahmed stuck with his call for a recession even as Wall Street ramped up bets that the Federal Reserve had led the U.S. economy toward a soft landing.
Ahmed, the firm’s global head of macro and strategic asset allocation, said the full impact of central bank monetary policy tightening and economic downturn is expected to be felt next year, following a wave of corporate debt refinancing over the next six months.
“The end of the cycle is a recession because the transmission channels will kick in,” he said in an interview. “If the Fed doesn’t exit at some point, everyone will have to pay higher real rates.”
Ahmad, who contributed to Assets, said the lagged effects of central bank tightening would eventually push the economy to the brink of collapse after years of easy money in the pandemic left companies with massive debt maturities in a new era of rising interest rates . Allocation strategy for Fidelity’s $47 billion multi-asset business.
All else being equal, higher debt servicing costs tend to reduce firms’ incentives to invest and pay workers. High equity valuations and tight credit spreads suggest the market hasn’t fully priced in the coming downturn.
“Borrowers aren’t feeling the full pressure of rates because their rates are locked in, it’s not a permanent phenomenon,” he said. “A company is financing at 2%, 3%, 4%, and now The financing rates were 10%, 11%, 12%. It was a huge shock.”
In response to a refinancing wall in early 2024, Fidelity International raised its cash weight to Overweight after remaining Neutral for the past two months. They remain underweight equities, overweight investment-grade credit over high-yield bonds, and adjusted their overweight government bonds to neutral in September.
Ahmed’s gloomy forecast shares many Wall Street Economist are dropping their calls for a recession.
To him, the economy’s strength amid rising interest rates is a sign that the lagged effects of monetary policy are still playing out across the system, rather than a harbinger of a soft landing.
While the surprisingly resilient U.S. consumer and labor markets forced Ahmed to push back his forecast for an impending recession until next year and lowered his team’s chances of a recession to 60 percent from 80 percent, the Still Ahmed’s base forecast.
His reasoning is supported by the following evidence A recent study From a group of Fed officials. The report found that historically, regardless of future rate hikes, it takes about a year for businesses to feel the full impact of rate hikes that have already occurred.
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