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- Economist Frances Donald told Bloomberg TV that a sharper Fed pivot is ahead.
- With a slowdown in the US labor market, two negative quarters of growth could hit at the end of the year.
- When that happens, the central bank will have to ease quickly and beyond what markets expect.
Markets are right to price in a Federal Reserve policy pivot but should brace for a rate-cutting cycle that's sharper than expected, economist Frances Donald told Bloomberg TV.
"What we haven't bought into is that this would be like a two or three and done situation, that these would be insurance cuts," she said. "We believe we are heading into a proper downturn that will require a proper easing cycle."
Futures markets are eyeing two 25-basis point cuts closer to the end of this year, reflecting a newfound optimism among investors after April's jobs report came in weaker than expected, undoing fears that the Fed may need to keep rates high or even raise again.
But to the Manulife Investment Management chief economist, such weakness should also trigger some concern, as it makes a recession look all the more probable.
"Just about everything in the labor market that explains where we are in the labor cycle is pointing to a deterioration," Donald said. "We're not saying it's a big crisis, we're calling for two quarters of negative GDP — Q3 and Q4, could be Q4 and Q1."
Though she acknowledged that her team has held recessionary outlooks for a while now, incoming data continues to reconfirm that downturn odds are much higher than chances of a reacceleration, she said.
That includes household and temporary employment stats, consistent job loss data, dropping quit rates, and a pullback in small business hiring.
The labor market's wear down also underpins recession calls made by the veteran forecaster Danielle DiMartino Booth, who told Bloomberg on Monday that the US is already in a downturn. That's based on an indicator that tracks unemployment across a 12-month period.
As the US economy slows down, Donald expects current interest rate levels to be increasingly intolerable, explaining why the Fed will have to pivot quickly.
"The average time between the first rate hike and its impact on businesses and consumers is two years. So we're not exiting the period in which rate hikes become really impactful in the economy," she said. "We're entering that period."
Previously, she noted that the Fed's inability to cut rates sooner than later is adding risk of something breaking in the near term.