Inflation, Interest Rates, and the Uncertainty of a Potential Recession
By Is the current economic climate indicative of a recession?[0] This is the question on many people’s minds as economists are divided on where the US economy is headed.[1] 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.[1] 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.[2]
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.[3] What we really need to look out for, says one economist, is the danger of a major recession.[4]
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.[5] 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.[5]
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.[6] Should inflation persist, it is likely that interest rates will remain steady, resulting in economic growth.[6] In the meantime, the only certainty is uncertainty; only time will tell if the US will avoid a recession or not.[3]
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
