Why the Fed won't be able to avoid a recession or bring inflation down to its 2% target, according to BlackRock

• The Fed may not be able to avoid a recession – and may not be able to bring inflation down to its 2% target either, according to BlackRock.
• "The Fed will be surprised by the growth damage caused by its tightening," analysts said in a note on Tuesday.

The Federal Reserve may not be able to avoid a recession – and may not be able to bring inflation back down to its 2% target either, according to analysts from BlackRock.

Markets are expecting the Fed to stick to aggressive rate hikes after Chairman Jerome Powell's speech at Jackson Hole last month.

But higher rates won't solve the biggest problem, namely low production capacity, analysts said, meaning low supply relative to demand. Without addressing supply, the Fed would have to lower demand by 2% via rate hikes to get inflation down quickly.

"The Fed will be surprised by the growth damage caused by its tightening, in our view," analysts said in a note on Tuesday. "When the Fed sees this pain, we think it will stop raising rates. It will be too late to avoid a contraction in economic activity by then, we think, but the decrease won't be deep enough to bring PCE inflation down to the Fed's target of 2%. Instead, we expect inflation to persist close to 3%."

The Federal Reserve has scrambled to bring down sky-high inflation this year, but so far, has only seen only a slight fall to 8.5% inflation in July.

Meanwhile, GDP has declined for two consecutive quarters, signaling the US is already in a technical recession, and supply bottlenecks from the pandemic are lingering in key markets.

"The U.S. economy has already stalled. Now we see recession in the cards early next year," BlackRock said.

Other investment banks have chimed in with similar recession predictions, given the severity of inflation and the rate of hiking needed to fully quell high prices.

Goldman Sachs warned that, despite mild losses this summer, the market has been "complacent" about the recession risks due of Fed tightening, and analysts from JPMorgan warned that a recession could be possible, due to the tough balancing act of lowering inflation while maintaining economic growth.