text: Good morning. Here’s your Early Warning for Thursday, 27 October 2022.TODAY’S BRIEFING:READ TIME: 10 mins 31 secondsInFocus: Weekly Economic Outlook Inside the BeltwayDomestic INTSUMGeostrategic INTSUMLow-Intensity Conflict Activity Rollup & OutlookInFocus: Weekly Economic OutlookRisk of over tightening: Federal Reserve officials continue to warn about the risk of over tightening as previous rate hikes move through the economy. San Francisco Fed Bank President Mary Daly underscored the central bank’s narrow line this week, saying that the Fed risks over tightening, which will lead to a deep recession, but also risks under tightening, which will bolster inflation. Daly also talked about the possibility that rate hikes will start to slow, with the Fed stepping down future increases to 25bps or 50bps, down from 75bps. We’ve seen several warnings from traders and fund managers who say that continued 75bps rate hikes will “crash the U.S. economy” and force a Fed pivot. This view may be shared by Fed officials, especially if they lower future increases to the Federal Funds Rate. The main risk of a Fed pivot – cutting rates to lessen the impact of a recession instead of raising rates to combat inflation – would likely also force a reversal in dollar strength and bolster inflation. I still think a Fed pivot is unlikely unless “something breaks,” i.e., a financial crisis. If the Fed does lower future rate hikes, it’s because they see a recession on the horizon. The Fed is scheduled to make a decision on further rate increases in November and December. It’s something I’m watching.Risk of recession: Goldman Sachs analysts continue to say that the U.S. economy is not on the verge of recession, reflected in this morning’s Gross Domestic Product (GDP) read. The U.S. economy in Q3 grew by an annualized rate of 2.6%. In previous weeks, I’d noted a shift in investment bank outlooks that the U.S. economy would resume growth, so this is not surprising. Part of the weakness surrounding the “technical recession” was large trade deficits, which shrunk GDP growth. With trade deficits decreasing over the past quarter, GDP rebounded. I still think the biggest recession risk comes next year as we continue to feel the effects of the Fed’s interest rate hikes. Plus, there are just too many potential geopolitical shocks over the next 12 months: a renewed Russian campaign in Ukraine and potentially nuclear escalation, a China-Taiwan conflict, a new China trade war and potential retaliation for the CHIPS Act, a new Middle East war between Israel and Iran, a potential escalation or conflict between North and South Korea, etc. These developments could cause financial and trade shocks that trigger a global recession. Goldman analysts add that they’re still uncertain whether the Fed will deliberately cause a recession in order to kill inflation. Additionally, Goldman analysts note that the risk that “an unforeseen factor will cause a recession, is probably somewhat higher than usual.”Risk of financial crisis: In previous weeks, I’ve discussed numerous warnings about a liquidity breakdown in the U.S. Treasury market. This week, Treasury Secretary Janet Yellen said she’s working with regulators to improve the market’s ability to “absorb shocks and disruptions, rather than to amplify them.” In the same speech, Yellen also mentioned that problems could occur in the non-bank sector. I don’t have the transcript, but she’s likely referring to non-bank financial institutions like private lenders and financial tech companies like Venmo. JPMorgan Chase CEO Jamie Dimon has also warned that this will be the most likely culprit behind the next financial crisis. – M.S.INSIDE THE BELTWAYWHITE HOUSE: President Biden is scheduled to deliver remarks on Micron’s plans to invest in semiconductor manufacturing in New York.CONGRESS: Nothing Significant To Report (NSTR)DOMESTIC INTSUM