Looming recession is seen increasingly by analysts in the US after Federal Reserve hiked interest rates Wednesday. The most significant increase in the rates since 1994 is seen by analysts on Wall Street as signs of weaker consumer spending.
The Looming Recession
The Federal Reserve hiked 75 basis points in its policy rates that remain in the range of 1.5% to 1.75%, with officials intensifying their struggle to contain inflation that has remained high despite recent measures.
Wells Fargo & Co. has now predicted a mild recession from mid-2023, with inflation having entrenched itself in the economy and eating into the consumer spending power. While the Fed takes aggressive steps to address inflation, Moody Analytics said that the chances of a soft landing are lower.
Ryan Sweet, the head of monetary policy research at Moody’s Analytics, said in a research note that while the Federal Reserve will keep hiking interest rates until they break the inflation; the risk is that they will also hurt the economy. According to him, the effect of monetary policy, the tightening in the financial market and slow growth are yet to hit the economy.
As high prices hit the consumer’s pockets, retail sales fell for the first time in May after five months. On Wednesday, the Federal Reserve Bank of Atlanta revised its growth estimates for the second quarter to 0 percent. Scott Minerd, the Chief Investment Officer of Guggenheim, said that the US might already be into recession given the consumer spending slowdown.
According to many economists, it will be difficult to avoid a contraction next year. In a note, Jay Bryson of Wells Fargo said he was expecting a soft landing a week ago, but now he expects a mild recession.
Unemployment, however, remains historically low. The joblessness data rose to a five-month high last week, but the job market remains tight. As per Wells Fargo, strengthening derived from a favorable job situation will help support additional funding and prevent the economy from contracting too deep.
According to Bloomberg Economics’ latest estimates, the recession, which was supposed to start by 2024 a few months back barely, now sees three out of four probabilities. A recession is a broad decline in the overall economic activity and lasts for a few months. The US has just come out from the covid-19 pandemic, which was its biggest slump after WWII.
