The Federal Reserve’s task is to slow down the U.S. economy in order to manage inflation, but not too much so that it tiptoes into recession.
On Wednesday, the Fed will announce a half percentile point increase to its benchmark interest rate. This is what the financial markets are expecting. This rate is used to control the interest banks pay each other in short-term borrowing, and also provides a guideline for consumers who are interested in consumer debt.
There are growing doubts that it will pull it off. Even some ex-Federal officials have expressed concern. Wall Street witnessed another day of whipsaw trading Monday afternoon, with the Dow Jones Industrial Average and S&P 500 rebounding after being down more than 1% earlier in the session.
Roger Ferguson, ex-Fed vice chairman and spoke out to CNBC that “a recession at this point is almost inevitable.”Squawk BoxIn a Monday interview. “It’s an evil mixture, and the possibility of a depression I believe is extremely high due to their crude tool and inability to control aggregate demand.”
In fact, the most significant factor in inflation is the supply side, since the demand for goods outpaced supply dramatically during the Covid-era economic boom.
Fed officials had spent much of 2021 insisting on the fact that the problem would “transitory”, and will likely disappear when conditions return to normal. However, this year they have to recognize the severity and persistence of the problem.
Ferguson stated that he expected the recession to strike in 2023 and that he hopes it will be mild.
Hiking, and the’recession that comes along with it’
This week, the Federal Open Market Committee is pivotal. Policymakers are nearly certain to approve an increase in interest rates by 50 basis points. They also have the potential to make announcements a reduction in bond holdingsThese were accumulated in the course of recovery.
Chair Jerome PowellThe Fed will need to make all this clear to the public. It must draw a line between an Fed determined to suppress inflation but not kill an economic system that recently has appeared vulnerable to shocks.
“That means you have to raise enough to keep credibility, start shrinking the balance sheet and that he has to accept the recession,” stated Danielle DiMartino Booth (CEO of Quill Intelligence) and former Dallas Fed President Richard Fisher’s top adviser. That’s an extremely hard message to send.
Wall Street is rumored to be waging a recession, but most economists think that the Fed has the ability to tighten inflation and avoid an economic crash landing. This week’s rise of 50 basis points will be followed by an increase of 75 basis points by June. After that, the Fed will settle back to a slower pace which eventually brings the funds rate up to 3%.
However, none of this is guaranteed and will be heavily influenced by an economy. contracted at 1.4% annualized paceThe first quarter of 2022. Goldman Sachs stated that it anticipates this reading falling to 1.5%, but it still expects 3% growth in the second quarter.
Beware of poor timing
Tom Porcelli (chief U.S. economist, RBC Capital Markets) stated that there are “growing threats” to the economy which could cause the Fed to abandon its plans.
Porcelli stated in a note that while people seem very focused on the here and now earnings/data, which appear to indicate all is well at the moment; the problem is that cracks are growing.” “Moreover, this is all happening as inflationary pressures are quite likely to slow — and possibly slow more than seems appreciated at the moment.”
On Monday, there were new signs of growth that could at minimum slow down: ISM Manufacturing IndexIn April, the employment index dropped to 55.4. It is an indication that this sector continues expanding at a slow pace. Perhaps more importantly, the employment index for the month was just 50.9 — a reading of 50 indicates expansion, so April pointed to a near-halt in hiring.
What about inflation?
Still, twelve-month readings have the highest level in over 40 years. However, the Fed prefers to measure saw. a monthly gain of just 0.3%The month of March. March. Dallas Fed’s trimmed meanThe readings of either side of the range are called ‘The Graph.’ It fell from 6.3% in January to 3.1% March.
These kinds of numbers evoke the most fearful fears among Wall Street: that a Fed far behind inflation in its beginnings may become as rigid when tightening is concerned.
They’ll reiterate that they’re data sensitive and will continue to do so. James Paulsen is chief investment strategist for The Leuthold Group. There is definitely slower real growth. Although it’s not on a falling cliff, the pace of growth is moderate. They’ll likely be more aware of that in the future.
