US Federal Reserve Denies Technical Recession
Last month, on 27 July the US Federal Reserve had their FOMC meeting to discuss their stance on the current economy and their projections for the future.
As expected, we received a 75-basis point hike as the Fed is urging to swiftly deal with the US’ high levels of inflation. However, we also received data of a second consecutive quarter of negative growth - meaning that we are now in a technical recession.
Despite this, Jerome Powell stated that he did not believe that the economy was in a recession due to a strong labour market.
“2.7 million people hired in the first half of the year; it doesn’t make sense that the economy would be in recession”
However, the Federal Reserve also highlighted plans to front-load interest rates. This means that they will aggressively hike rates right now to slow down in the future when they believe interest rates are at an appropriate position to constrain inflation. This will give the Federal Reserve flexibility to adjust interest rates and ultimately, places them in a better position to react to economic changes as necessary.
Source: Investopedia
Currently, inflation is at 9% in the US whilst the Federal Reserve is targeting a 2% inflation over the long run. With higher interest rates, there will be a trade-off of restraining inflation at the cost of economic growth and employment.
Though Powell insists that we are not in a recession, many analysts believe that we are in the midst of one with 40-year high inflation and a poor federal funds rate position.
What's next?
The Federal Reserve’s next move is anyone’s guess. The bank tends to be reactive towards economic data rather than speculative, so the main indicators that we will have to look out for coming into the next FOMC meeting in September will be inflation and employment data.
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Disclaimer: This article does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
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