Macro Salman Ahmed Global Head of Macro and Strategic Asset Allocation What happens next depends on the Fed As we move into 2023, the global economy continues to face a confluence of challenges. From persistently high inflation and aggressive global policy tightening (led by the Federal Reserve) to the continued fallout of the Russia-Ukraine war and the energy crisis, weak consumer confidence and political disruptions, our base case remains a hard landing. Through the last quarter of 2022, our proprietary activity trackers have indicated a continuing slowdown, with a recession likely in the US and near certain in Europe and the UK. In the US, the Fed appears set on raising rates late for the US economy. Real rates have been significantly beyond neutral levels to bring inflation positive for some time and in some parts of the under control. We do not expect a pivot until yield curve pushing towards pre-Global Financial there is a meaningful deterioration in hard data, Crisis (GFC) levels. We have repeatedly argued especially inflation and the labour market. The that the financial system cannot take positive real US housing market is already showing signs of rates for any material length of time (due to high stress, as higher mortgage rates and reduced levels of debt) before financial stability becomes an affordability stifle transactions. However, inflation issue. Given liquidity and assets are already under and the labour market are still strong, compelling considerable pressure, the system could start to the Fed to keep going, given their focus on current crack. There is a risk that if the Fed stays true to its spot data against the backdrop of underestimating current word and doesn’t stop until inflation is back inflationary pressures last year. near 2 per cent, a “standard” recession could turn At this juncture, one important concern is that the Fed into something worse. is too focused on backward looking data, especially in relation to the labour market. By the time that shows signs of weakness, it may already be too 6 Investment Outlook Fidelity International