U.S. Federal Reserve (Fed) Chairman Jerome Powell warned on Friday that economic growth will slow as central banks grapple with decades of high inflation, signaling an imminent recession. Fears have calmed down recently, but have escalated again. The recent strength in the job market could soon start showing signs of weakening.
In his much-anticipated Jackson Hole speech on Friday, Powell declared to the hawks that the Fed would “force” to use its tools to combat inflation, saying that to do so would require “some money to be spent on households.” Bring pain and business.”
Powell made no mention of the possibility that Fed policy could trigger a recession, but Oanda analyst Ed Moya said in an emailed comment on Friday that the speech was an indication that the Fed was pushing the economy forward. To cool it down, he said, it showed it was “committed to restrictive policies that will ultimately plunge this economy into recession.” Inflation has remained near his 40-year high for much of this year.
“The Fed is flipping the script,” said Jeff Klingelhofer, co-head of the investment division at Thornberg Investment Management, saying the central bank is pushing for low interest rates and accommodative policies during the pandemic. has supported the market, but is now shifting its focus to price stability, much like it did before the Great Recession.
Cliff Hodge, chief investment officer at Cornerstone Wealth, said Powell’s speech “clearly suggests that the Fed is okay to risk a recession to keep inflation down. ‘, raising the possibility of a recession within the next year.
On Friday afternoon, Goldman Sachs economists said the speech did not make the Fed more aggressive with its policy, but risks were still “tilted to the upside.” They put the chance of a recession next year as he puts it at a one-third, while others, including Nomura, think it will start later this year.
Powell acknowledged on Friday that the labor market “is very likely to see some softening” as the Fed tries to keep inflation under control. Despite widespread reports of job cuts and job freezes, the economy recorded impressive job growth in July, with more than half a million jobs added. In a note on Wednesday, Goldman economists said they expected the recent weakness to begin to be reflected in the next report, notably that job openings would only “fall further”.PwC said: Nearly 50% of U.S. executives are considering or planning job cuts in the next 6-12 months.
Stocks plunged after Powell’s speech on Friday, gaining about 15% since the Fed hiked rates in June. Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said, “If the Fed continues to raise rates until the U.S. enters recession, the stock market will fall 20% to 30% from its previous peak. The S&P is down nearly 15% this year after gaining 21% last year.
New home sales in July were far below expectations, plunging nearly 13% to their lowest level since January 2016, according to data released on Tuesday. Last week, homebuilders and realtors declared a recession in the housing market. Rising house prices and mortgage rates continued to sideline potential buyers, pushing demand to its lowest level since the turn of the century.
When it comes to inflation, the news hasn’t been quite as good as alleviating investor fears. The Fed’s most closely watched inflation gauge, the Personal Consumption Expenditure Price Index, fell last month at its slowest pace in more than a year, far exceeding economists’ expectations, according to Friday morning data.
Federal Reserve Board
So far, the central bank has raised interest rates by 2.25 percentage points this year. Goldman expects most of the rate hikes to be past, with a 50 basis point hike in September and only 25 basis points in November and he said in December. But on Friday Powell leaves the door open for another 75 basis points of rate hikes, and a more aggressive move is sure to rock markets.
Fed’s Jackson Hole meeting: Stocks plummet after Powell warns inflation needs ‘restrictive’ policies for ‘some time’ (Forbes)
GDP flashes warning signs of recession again: Economy shrank 0.6% last quarter as experts warn ‘it will get worse’ (Forbes)
Recession Watch: Doesn’t seem imminent, but housing collapse deepens as Fed officials warn ‘the economy will slow down’ (Forbes)
Bank of America warns of ‘textbook’ bear market rally, predicts new lows for stocks (Forbes)