text: Good morning. Here’s your Early Warning for Thursday, 28 July 2022.TODAY’S BRIEFING:READ TIME: 10 minutes, 5 secondsInFocus: Weekly Economic OutlookInside the BeltwayDomestic INTSUMGeostrategic INTSUMLow Intensity Conflict Activity Rollup & OutlookInFocus: Weekly Economic OutlookThe Federal Reserve met yesterday and agreed to raise interest rates by 0.75%, the fourth hike this year. The Fed noted that indicators of spending and production have softened, although they pointed to low unemployment and jobs increases as signs of a healthy economy. The Bureau of Economic Analysis this morning reported Q2 GDP at -0.9%. Following Q1’s -1.6%, the U.S. has entered a recession, or two straight quarters of economic growth. Like the picture the White House painted last week, the Fed is pushing the “technical recession” narrative, implying this isn’t a “real recession.” And the Fed is still leaving open the possibility that they can engineer a soft landing.In a note to clients this week, BlackRock, the world’s largest asset manager ($9T AUM), says this is unlikely. Like other firms, their analysts believe the Fed will begin cutting rates in 2023, which is indicative of a recession. BlackRock is also calling for more volatility. Two of their investment themes include:The period of steady economic growth and low inflation is over. “In the U.S., we expect volatile growth and persistent inflation… The downside [risk] is that the Fed fails to change course next year and slams demand down to meet low [production] capacity.” In other words, if the Fed is unable to bring down inflation through a strong dollar (relative to foreign currencies, making imports feel cheaper) and hiking interest rates, then the risk is that they become draconian to crush demand.Americans are going to be living with inflation due to lower production capacity and supply constraints. The lockdowns in China, war in Ukraine, and an American workforce that hasn’t returned since the pandemic are all contributing to tighter supply.BlackRock also says that the markets haven’t caught up to the reality of weaker earnings – something I mentioned in previous weeks – so they expect more sell offs in U.S. equities.Looking ahead, nothing in my view has changed. The Fed says they have reached a “neutral” federal funds rate of 2.25-2.5%. Fed chairman Jay Powell said this week that they may pursue another “unusually large” rate increase in September, and that they want interest rates to be at 3.5-4.0% by the end of the year. Powell also said that the U.S. economy has not caught up to the higher rates. Already entering a recession, “technical” or otherwise, this says further economic slowing – a deeper recession – is ahead.A final note on inflation: My greatest concern has been that the rising interest rates and quantitative tightening are not enough to combat accelerating inflation. This would mean we have runaway inflation that the Fed is unable to control, similar to what this country experienced between 1965-1982.June’s Consumer Price Index (CPI) hit 9.1%, which followed May’s 8.6%. As of last month, inflation was still accelerating. CPI is a poor measure of inflation and we all know that “real inflation” is much higher, but I’m using CPI as a baseline. July’s CPI, which is due the second week in August, will have seen three interest rate hikes. If you believe the Fed, that number should have already peaked. It may not.