Economic war is economic war, says Credit Suisse chief

According to Zoltan Pozsar of Credit Suisse Group AG, the US economy may need a deeper and longer recession than investors currently anticipate before inflation can be brought under control, according to Zoltan Pozsar.

Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York, wrote in a client note that markets expect the surge in consumer prices will soon peak and central banks will become less hawkish.

The world is being damaged by an economic war that is undermining the deflationary relationships that have prevailed in recent decades, where China and Russia supplied cheap goods and services to more developed nations, such as the US and Europe, he said.

Pozsar wrote that war is inflationary. Think of the economic war as a fight between the consumer-driven West, where demand has been maximized and the production-driven East, where the level of supply has been maximized to serve the needs of the West. That pattern held until East-West relations soured and supply snapped back, he said.

The result is that inflation is now a structural problem rather than a cyclical problem. The changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronaviruses, have resulted in supply disruptions, according to Pozsar.

There is a risk that the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile, he said.

Pozsar s warning that inflation will remain elevated puts him at odds with the Treasury market, which rebounded last month after investors switched their focus to the recession risks and inflation concerns. The latest US inflation reading of 9.1% for June is well above the Fed 2% goal, but the price surge is expected to slow for the first time in three months to 8.8% in July, according to a Bloomberg poll of economists.

The bond market is more misguided now than any other time this year as traders bet that the US central bank will start cutting rates in early 2023, according to Bloomberg Economics chief US economist Anna Wong and her colleagues. Money markets are betting on one percentage point of hikes by the end of the year, followed by a quarter-point cut by June.

Pozsar wrote in his note that interest rates may be kept high for a while to ensure that rate cuts won't cause an economic rebound an L and not a V, which could cause a renewed bout of inflation. Powell will try his best to curb inflation, even at the cost of a depression and not get reappointed, because of the risks. The Pay Later Juggernaut Is About to Be Tested, None The Buy Now, Pay Later Juggernaut Is About to Be Tested