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Looming Recession Has Federal Reserve Against Wall

Business, Featured

Federal Reserve symbol | Image by Andrii Malkov

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The American economy shows strong signs that a recession is on the horizon. Research done by Phoenix Capital suggests the recession could hit in as little as six months.

The bond market is sparking the most concern, as it looks to be in severe distress.

In March, the Federal Reserve implemented its first interest rate hike since December 18, set at 0.25%. Afterward, the Federal Reserve typically looks to the 2-year U.S. Treasury bond’s yield to determine additional interest rate increases.

Despite the increased interest rate, the yield on the bond had increased exponentially. It moved the same amount in the past six months as it had in the last six years, meaning the Federal Reserve is behind the curve of the bond and will need to make significant moves to catch up. This substantial difference was driven by several factors, inflation, the job market, and the invasion of Ukraine.

According to CNN Business, Deutsche Bank is forecasting a recession. It emphasizes that the Federal Reserve will have to hit the brakes on the economy, undoing the good of the past two years.

The United States economy has made strides toward substantial progress since the downturn caused by COVID-19. The recession caused by the pandemic ended within a two-month time frame and allowed the economy to regain a 91% back to normal rating from CNN economists.

Now, concerns arise that the U.S. economy could be headed back the way it came.

Deutsche Bank economist Matthew Luzzett told CNN, “We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession.”

He noted his outlook was informed by skyrocketing inflation and the Ukrainian war. Consumer prices have been rising at the fastest rate the economy has seen in 40 years.

Indeed, JPMorgan Chase CEO Jamie Dimon shared in his annual shareholder letter that the current economic situation is similar to the 1973 oil embargo crisis.

The National Review quoted Larry Summers of The Washington Post, who stated that anything could happen, but that historically if the inflation rate is above 4% and the unemployment is below 5%, then a recession would occur within a 2-year timeframe. Currently, inflation sits at 6%, and unemployment is 4%.

However, some projections suggest the Federal Reserve could get ahead of the curve through only a mild recession.

Deutsche Bank stated, “With the unemployment rate receding only slowly following the peak, inflation should continue to moderate, falling to the Fed’s 2% objective in 2025.”

Federal Reserve Chairman Jerome Powell attempted to soothe fears in his last month’s address, stating that a soft landing without a harsh recession is possible, and noted the years 1965, 1984, and 1994 as prime examples.       

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