Inflation, Recession And The Fed

WASHINGTON, DC – NOVEMBER 02: U.S. Federal Reserve Bank Board Chairman Jerome Powell answers … [+] reporters’ questions during a news conference following a meeting of the Federal Open Market Committee (FMOC) at the bank headquarters on November 02, 2022 in Washington, DC. In a move to fight inflation, Powell announced that the Federal Reserve is raising interest rates by three-quarters of a percentage point, the sixth interest rate increase this year and the fourth time in a row at rates this high. (Photo by Chip Somodevilla/Getty Images)

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U.S. inflation increased 5.0% for the 12-months ending March 31, 2023. Prices for energy along with used cars and trucks fell by 6.4% and 11.2% respectively, while all other items rose. For example, food prices remain high as food inflation increased 8.5% over the past 12 months. The cost of shelter rose 8.2% and transportation services increased 13.9% during the same period. Will the Fed continue to raise rates? Will the U.S. avoid a recession? What about inflation in the rest of the world?

Inflation: Cause

The pandemic has left more than a trail of unfortunate deaths and other health issues. It has left a host of financial problems, inflation being near the top of the list. What caused this recent round of price increases? Inflation emerges when demand becomes stronger than supply. Of course, COVID-19 restricted supply as companies closed and workers were sidelined. Although there has been some improvement, there is still a labor shortage as companies struggle to produce an adequate amount of goods. On the demand side, governments took fiscal policy to a new level. In short, fiscal policy – which includes government spending, has risen to previously unimaginable levels. This excess in spending caused demand to spike as COVID shuttered the supply chain. The result? Inflation is running well above historical norms. Moreover, this is a global concern (more on that in a moment).

The Fed: More Rate Hikes?

Will the Fed continue to raise rates? It is the opinion of this author that the Fed will indeed continue to raise rates. We are, however, much closer to the end of the rate hikes than the beginning. As inflation continues to fall, we may see one or two 0.25% rate increases this year. Will the Fed begin to cut rates in 2023? In the absence of an unforeseen economic shock, I don’t believe this is likely. It seems more probable that future rate cuts will occur in 2024.

Is a U.S. Recession Looming?

Will the U.S. economy enter a recession? I believe we will experience a recession either later this year or in early 2024. Historically, the Fed has gone too far with rate increases and has tipped the economy into recession. Will the same be true this time? I wouldn’t bet against it. However, even if we enter a recession, I expect it to be mild.

Global Inflation

According to Trading Economies, the highest reported inflation is found in Lebanon where prices rose by 189.67% for the previous 12 months. Venezuela has seen an increase of 155.80% followed by Syria (139.46%), and Argentina (102.50%). When we examine the largest economies in the world, we find inflation ranged from a low of 0.70% in China to a high of 10.40% in the U.K. Out of 190 countries, inflation rose by more than 5.0% in about 140 of them.

If we have a mild recession, and if inflation is tamed, we should get through this period without much more damage. The primary concern at this point is with the Fed. Will it continue to raise rates in its effort to slow demand? The next Fed meeting is May 2-3 where it’s likely the Fed will vote to raise another 0.25%. After that the Fed will meet June 13-14, July 25-26, September 19-20, October 31-November 1, and December 12-13.

Stay tuned for more information.

Source: https://www.forbes.com/sites/mikepatton/2023/04/12/inflation-recession-and-the-fed/