Recession fears grow as the Fed considers stepping up the fight against inflation

What prompted the Fed to consider raising the cost of borrowing was an inflation report that beat expectations by coming out hotter than expected and surveys that showed consumers were upping their expectations of how much prices would be strong in the next year will increase.

“They want to make sure inflation doesn’t take hold,” said Diane Swonk, chief economist at Grant Thornton, who says the Fed’s actions could trigger a recession. “The question is, when are you going to stop? They won’t know they’ve gone too far until they get there.”

Consumer confidence has tumbled — an influential poll shows it has fallen to its lowest on record — as confidence in the Fed and Biden administration has been shaken. Fed Chair Jerome Powell and President Joe Biden spent much of last year declaring price spikes “temporary” before backing down from that stance as inflation continued, fueled by strong consumer spending, disorganized supply chains and rising food prices. and energy costs.

The fear is that the Fed has waited too long to bring borrowing costs down and now it must compensate by slamming on the brakes too hard and risking a recession.

“We’ve built up a kind of stagflation,” former Treasury Secretary Larry Summers said in a recent interview on Bloomberg TV, referring to an environment of high inflation and stagnant growth. “A soft landing won’t be easy.”

Even if the country avoids a recession, the Fed’s efforts are likely to reduce job openings, slow wage growth, increase corporate debt burdens and keep mortgage rates higher.

The market turmoil is adding to the already buoyant sentiment reported by American consumers, despite an unemployment rate of 3.6 percent giving workers more flexibility to change jobs and negotiate higher wages. The benchmark stock index S&P 500 fell for the fifth straight day on Tuesday.

And if the economy begins to contract before the end of the year, it could have far-reaching implications for the composition of Congress.

“The gloomy mood in the country — only exacerbated by worsening inflation and now the stock market sell-off — probably just confirms the conventional wisdom that Democrats are poised to lose the House,” said Libby Cantrill, public policy director at the Wealth Manager PIMCO . “The real question will be by what margin.”

Right now, investors and lenders are trying to figure out how much the Fed will ultimately decide to hike rates, a calculation that then immediately begins to influence their behavior even before the central bank follows suit. In fact, interest rates on corporate and US government loans have skyrocketed sharply higher since last week as soaring mortgage rates are rapidly cooling the once sweltering housing market.

“Financial conditions have tightened at an alarming rate over the past four days,” said Jason Furman, a Harvard University professor and former chief economist to President Barack Obama. “Paradoxically, this could mean that tomorrow marks the end” of market-driven increases in borrowing costs – unless the Fed signals it could hike even more than markets are anticipating.

It will take time for these market moves to feed into economic activity, but “if you move faster sooner,” it speeds up how quickly a recession could follow, Swonk said.

Higher debt costs could also trigger a wave of bankruptcies for companies that have been able to make payments due to long-low interest rates. In the worst case, lenders could pull back sharply.

Whether the Fed will further raise market expectations for the level of borrowing costs depends on the incoming data; his thoughts on a bigger rate hike came after Friday’s consumer price index suggested prices were not easing. A key indicator on Tuesday also showed that costs for businesses, particularly energy, are soaring, offering little hope of price relief in the near term.

Meanwhile, activist organizations convened by the Fed-Up campaign rallied outside Fed headquarters on Tuesday to urge policymakers to keep the labor market in mind as they try to lower inflation.

Lindsay Owens, executive director of progressive think tank Groundwork Collaborative, told the crowd that rate hikes would do little to lower inflation, which is now being driven by factors beyond the Fed’s control, such as Russia’s invasion of Ukraine and factory closures in China .

“The only thing worse than high inflation and low unemployment is high inflation and high unemployment,” she told a news conference. “If our monetary policies lead to a massive slowdown in the economy, we will all pay the price.”

Recession fears grow as the Fed considers stepping up the fight against inflation

Source link Recession fears grow as the Fed considers stepping up the fight against inflation

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