Recession In Early 2024 Is 'A Reasonable Possibility', Says Roger Ferguson

The year is coming to an end, and with it, there are speculations about the future of cash. Will we start running out of it? Some experts believe that it might be an early event in 2024. Among these experts is Roger Ferguson, the former Vice Chairman of the Federal Reserve and a CNBC contributor. I had the opportunity to sit down with him in person here in Aspen to discuss the next set of decisions facing the Fed.

Ferguson points out that the Federal Reserve is currently grappling with an entrenched inflation. This, he believes, increases the possibility of a recession by early 2024. It seems like a reasonable possibility, given the complexities of our economic landscape.

Bursting the Bubble: The Debate on Jay Powell's Next Move

There is a lot of debate surrounding the actions of Federal Reserve Chairman Jay Powell. Many wonder if he will go further in his efforts to combat inflation. Ferguson belongs to the camp that believes there is more to be done. He argues that inflation is a stubborn issue that needs to be tackled head-on. The Federal Reserve has been clear about its goal of bringing inflation down to 2%. To achieve this, they might have to continue raising interest rates until they are convinced that inflation is on a downward trajectory. This could potentially lead to three rate hikes or even more, depending on the data.

The question then arises: will we see these three rate hikes within this calendar year or early next year? Ferguson suggests that the market might be a bit off in its predictions. The terminal rates, or the final outcome of the rate hikes, are still uncertain. However, he believes that the market has underestimated the number of rate hikes that might be necessary.

The Blame Game: Is the Fed Behind the Curve?

When discussing the inflationary story in the United States, the blame game begins. Is the Federal Reserve to blame for being behind the curve, or is there more to it? Ferguson argues that it's a combination of factors. While the Biden administration plays a role in the inflationary pressures, there are also global factors at play. Geopolitical issues, energy prices, and food prices all contribute to the inflationary landscape. Additionally, Ferguson acknowledges that the Federal Reserve was a bit behind in recognizing the transitory nature of inflation. However, he believes that the stimulus packages implemented by the administration were deeper than what was necessary to address the impact of COVID-19.

The Consumer Conundrum: Feeling the Effects of Inflation

While the numbers may indicate positive economic growth, the average consumer might not feel the same way. Ferguson points out that there is a disconnect between the supply-side measures taken by the administration and the actual increase in real wages. Inflation remains high, making it difficult for consumers to feel the impact of economic growth in their pockets. This poses a tricky dilemma for the administration as they navigate through this economic landscape. Ferguson argues that inflation is primarily a monetary phenomenon, with the Federal Reserve bearing some responsibility. However, he also believes that the administration's focus on driving supply will pay off in the long run.

ESG: The Changing Landscape of Investment

In recent years, Environmental, Social, and Governance (ESG) factors have become increasingly important in the investment world. Larry Fink, the CEO of BlackRock, has been a pioneer in promoting the integration of ESG factors into investment strategies. However, there has been a shift in the conversation surrounding ESG in the past year. Ferguson acknowledges that there is growing skepticism and political pressure around ESG factors, especially in the United States. He believes that investment managers and CEOs should consider ESG factors as part of their risk analysis. While there may be pushback from skeptics, it is important to recognize that ESG is a part of the risk portfolio.

Ferguson also emphasizes the importance of honesty and transparency when discussing ESG factors. It is crucial to acknowledge the risks associated with ESG and ensure that investors are appropriately compensated for taking on those risks. Additionally, he highlights the need to recognize that carbon emissions are still a part of the economy and cannot be completely disconnected from it. Managing these risks and paying attention to the energy transition will be key for pension funds and companies alike.

In conclusion, the future of cash remains uncertain. As we approach the end of the year, the Federal Reserve faces the challenge of combating entrenched inflation while making decisions about interest rates. The inflationary story in the United States is a complex one, with various factors at play. While the Federal Reserve may bear some responsibility, it is important to consider the broader economic landscape and the impact of global factors. Additionally, the integration of ESG factors into investment strategies is changing the way we think about risk and sustainability. It is crucial for investors and CEOs to navigate these changes with honesty and transparency. Only time will tell how these factors will shape our economic future.