Fed Tightening Measures May Spur Recession Despite Recent Positive Retail Sales
By The Federal Reserve’s attempts to control a 9.0% annual inflation rate in March of 2022 have led to seven successive rate increases by year-end.[0] This is an effective measure for cooling off the economy and combating inflation, but it’s possible the Fed has already increased rates too much and too fast, resulting in the current 6.5% inflation rate that is still above the Fed’s target of 2%–3%.[0] This could potentially push the economy into a recession with millions of Americans losing their jobs.[0]
Data released on Wednesday by the Commerce Department showed that retail sales increased by 3 percent in January, the most significant monthly increase in almost two years.[1] This is yet another indicator that the U.S. economy isn’t in a recession and may actually be gaining steam.[2] However, the data is sure to worry Fed officials, who want consumers to spend less so that companies are forced to bring prices down.[2] The prices are decreasing, but not at a rate rapid enough to provide comfort to working families or please the Federal Reserve.[2]
Analysts in the financial sector are forecasting that the Federal Reserve will increase the interest rate by two additional 0.25 percent increments at the next two meetings, which are expected to be minor adjustments to regulate the economy.[0] This week, some Federal Reserve officials suggested that more stringent measures may be necessary, even though they understand that these measures could potentially lead to a recession later in the year.[2] Despite some economists being optimistic that a “soft landing” is still achievable, the government’s data on rents is usually lagging by a few months, with private sector data indicating that rents have been dropping.[2]
During January, short-term interest rates increased in preparation for more Fed tightening.[3] The yield on the 3-month Treasury note went from 4.42% at the end of December to 4.70% at the end of January, which is close to the 25-basis point (bps) increase in the federal funds rate that happened on February 1.[3] It is not unexpected that short-term rates are connected to Federal policy and the federal funds rate.[3] Longer-term rates are typically more predictive, taking into account future inflation projections and potential Federal Reserve policy changes.[3] At the end of December, the 10-year Treasury note yield was 3.88%, but by the end of January it had dropped to 3.52%. This decrease was due to both lower inflation expectations and the market's increased likelihood of Fed easing this year, as opposed to Fed tightening.[3]
0. “Question of the month: How do you maneuver uncertainty in today's economy? – by Alan Doyle” New England Real Estate Journal Online, 10 Feb. 2023, https://nerej.com/question-of-the-month-how-do-you-maneuver-uncertainty-in-today-s-economy-by-alan-doyle
1. “Higher Core Yields Slightly Favoured the Dollar” Action Forex, 16 Feb. 2023, https://www.actionforex.com/contributors/fundamental-analysis/486701-higher-core-yields-slightly-favoured-the-dollar/
2. “What recession? Americans are still powering the economy despite high inflation” The Hill, 16 Feb. 2023, https://thehill.com/finance/3859880-what-recession-americans-are-still-powering-the-economy-despite-high-inflation
3. “DAVID BERSON: Equity and fixed-income markets responding favorably” Sarasota Herald-Tribune, 13 Feb. 2023, https://www.heraldtribune.com/story/business/2023/02/13/david-berson-equity-and-fixed-income-markets-responding-favorably/69876398007/
