The US dollar index rose to 105.40 after the Fed’s 75-basis-point key rate hike, while the stock and the crypto markets fell. However, during the past few days, investors and traders returned to risk assets as they expect inflation growth to slow. Moreover, Jerome Powell, the head of the Federal Reserve, announced the Fed might start cutting the key rate by 2024, which is the most evident hint of an upcoming market reversal.
Can a Recession Be Avoided?
2022-06-24 • Updated
Signs of a possible slowdown in the global economy have increased during the last two weeks. The pandemic continues hurting economic activity in China, the war in Ukraine is hitting the entire European economy, and the Federal Reserve's efforts to control inflation threaten to trigger a recession.
China's retail sales, the main measure of consumer activity, fell by 11.1% on an annual basis, compared to forecasts of 6.6%. Industrial production, which supported China's rapid economic recovery from the initial shock of COVID-19, fell by 2.9%.
In Europe, the European Commission expects the EU and Eurozone to expand by only 2.7% this year, well below the previous forecast of 4%. Inflation is likely to rise to more than 6% this year. So the ECB President Christine Lagarde signaled her support for a rate hike next July, paving the way for the Eurozone's first rate hike in more than ten years.
In the US, annual inflation is still at its highest level in 40 years, and there's a significant risk of a recession. This week alone, the former CEO of Goldman Sachs warned of "very, very high risks" of a recession. According to Wells Fargo, there's no doubt that a downturn is looming on the horizon. The former Fed Chairman warned that the US is poised to fall into stagflation, a slowing economy, and high unemployment accompanied by higher inflation. The odds of a recession are currently around 30%, according to the research by Moody's and a Wall Street Journal poll.
What can trigger a recession?
The main concern is that the Fed will raise rates too high too quickly in a short time, killing economic growth. Higher rates curb inflation by making it more expensive to borrow money, making it pricier for consumers to spend on goods and services, and for businesses to grow and hire workers.
If the Fed gets it wrong, a sharp rate hike could halt growth, causing a recession. With the Fed moving aggressively to tame inflation, there's no doubt that a contraction is looming, even if it doesn't develop into a recession.
Can a recession be avoided?
The outlook is not entirely gloomy. Some economic indicators point that the recovery is still on the right track, and the US economy is still on solid ground.
1. Industrial production in the US rose for the fourth consecutive month in April, hitting a 15-year high.
2. US consumer spending, which accounts for two-thirds of economic activity, remains strong, with retail sales growing at a healthy pace in April.
3. The labor market remains strong, as the US added 428,000 jobs in April, above forecasts for the second month in a row. If this pace continues, the US will reach full employment capacity by July.
In the end, despite the growing fears of recession or a downtrend, conditions are still good. For example, we haven't seen mass layoffs yet, which is a sign of recession. Consumer spending, which accounts for about 70% of US economic activity, is still holding up. If there's a sudden slowdown in spending, it will immediately negatively impact. Corporate profits will fall, and employers will start laying off workers to protect their profits. As for the US dollar, the hints of the upcoming recession will be harmful to the currency, while good economic news from America will drive it up.
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