Inflation, Interest Rates, and the Uncertainty of a Potential Recession
Is the current economic climate indicative of a recession? This is the question on many people’s minds as economists are divided on where the US economy is headed. At the root of this confusion is inflation, which rose last year and prompted the Federal Reserve to take action in the form of successive rate increases. This has been effective in reducing inflation from its peak of 9.1% last year, but the current 6.5% inflation rate is still well above the Fed’s target of 2%–3%, which will necessitate additional Fed interest rate hikes in the first half of this year.
Economists are divided on whether the Fed has already increased rates too fast and too high, and whether the economy will ultimately avoid a recession. Inflation eased again in January, though the higher-than-expected data has some economists worried that the Federal Reserve is going to prolong its interest rate hikes, which could tip the economy into a recession.
On one hand, the continued strength in the monthly employment reports points to a “soft landing” scenario. On the other hand, the rapid decline in growth is a recession signal in and of itself. What we really need to look out for, says one economist, is the danger of a major recession.
In anticipation of additional Fed tightening, short-term interest rates moved up during January, while longer-term rates tend to be more forward looking and fell over the course of the month. On Feb. 1, following the Federal Open Market Committee (FOMC) meeting, Fed Chair Powell's “dovish” comments, in addition to the lowest rate hike since April 2022, resulted in the yield decreasing to 3.39%. Nonetheless, it climbed back to 3.53% after the extremely positive January employment report.
Be mindful of potential economic and market volatility, especially during the first half of the year, as the Federal Reserve is expected to continue raising rates. Should inflation persist, it is likely that interest rates will remain steady, resulting in economic growth. In the meantime, the only certainty is uncertainty; only time will tell if the US will avoid a recession or not.
0. “Is the economy headed for recession or a soft landing?” North Country Public Radio, 17 Feb. 2023, https://www.northcountrypublicradio.org/news/npr/1157456149/is-the-economy-headed-for-recession-or-a-soft-landing
1. “Is the economy headed for recession or a soft landing?” WSIU, 17 Feb. 2023, https://www.wsiu.org/2023-02-17/is-the-economy-headed-for-recession-or-a-soft-landing
2. “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
3. “Recession Signal As Consumers Struggle To Pay Bills” Real Investment Advice, 17 Feb. 2023, https://realinvestmentadvice.com/recession-signal-as-consumers-struggle-to-pay-bills
4. “Economists still worry recession could be on the way. But here's how a soft landing may still be possible” CNBC, 16 Feb. 2023, https://www.cnbc.com/2023/02/16/economists-worry-about-a-recession-but-a-soft-landing-may-be-possible.html
5. “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/
6. “An economy in flux | Thebrightonblade.com” Brighton Standard-Blade, 14 Feb. 2023, https://www.thebrightonblade.com/stories/an-economy-in-flux,421045
Leave a Comment
You must be logged in to post a comment.