Shoppers at a supermarket in California, the United States, April 12, 2022. /CFP
Shoppers at a supermarket in California, the United States, April 12, 2022. /CFP
Editor’s note: Guo Lihua is a professor at the School of Economics at the Central University for Nationalities. The article reflects the author’s opinion and does not necessarily reflect the views of CGTN.
Since 1945, the US has experienced 12 recessions. Expectations of a rate hike driven recession are currently forming and are having a profound impact on global asset pricing.
Although the Fed has been on a rate hike cycle since March 2022, the US CPI hit a forty-year high of 9.1 percent in June 2022 and fell back to 7.7 percent in October, but inflation is still at elevated levels.
The causes of this round of inflation lie more in “supply-driven” characteristics. Under the impact of the Russo-Ukrainian war on international commodity and other energy prices, the prices of core commodities such as automobiles and other international supply chain disruptions have increased import costs; The rapid repair of the service sector in the late epidemic widened the labor market gap and formed a “spiral between wages and commodity prices” that together fueled the build-up of cost inflation.
At present, with several rounds of large-scale fiscal stimulus, the dominant inflation factor has gradually shifted from the supply side to the demand side, and the characteristics of demand-side inflation have gradually emerged.
From early March to now, the Federal Reserve launched the fastest wave of rate hikes since 1980 to fight inflation. Since November, the Fed has hiked rates a total of 375 basis points (bp) since March and the federal funds rate has been raised to between 3.75 percent and 4 percent.
The impact of the rate hike is clear and it is not a good time for the general public. The Philadelphia Fed’s manufacturing employment index plummeted to 7.1 percent in November from 28.1 percent, suggesting the job market is cooling rapidly. In September, total personal savings in the US fell 59.29 percent year-on-year and grew negatively for 18 straight months.
However, as interest rates continue to rise and mortgage rates rise, the pressure on the population to pay variable mortgage rates increases. As the income and expenditure situation shows, consumption could experience a clearer recession in the first quarter of 2023.
Investment indicators are not good either, in the third quarter of 2022, the growth rate of US construction investment and housing investment fell to -11.36 percent and -12.74 percent, respectively. Although US GDP rose from negative to positive in the third quarter due to the net export drive, the decline in personal consumption, real estate and other industries in the high-yield environment, the investment slowdown and the economic downturn were inevitable.
Fed Chair Jerome Powell /VCG
Fed Chair Jerome Powell /VCG
In terms of the external environment, the global economy faces many challenges amid the ongoing COVID-19 pandemic. The regional situation is volatile, the financial environment is deteriorating and countries are struggling. On Oct. 11, the IMF released its World Economic Outlook report, which forecast global economic growth to slow to 2.7 percent in 2023, down 0.2 percentage point from the July forecast. Against the backdrop of a global recession, the US is not alone.
It is too early to conclude that the US is on the verge of entering a deep recession. On November 16, data from the US Department of Commerce showed that adjusted retail sales rose 1.27 percent year-on-year in October, the highest level since February this year.
On August 16, the US Congress passed the Inflation Reduction Act, which provides funds for energy security and climate investments, and subsidizes the Affordable Care Act, which could use government spending to restructure the industry and pave the way for economic recovery.
Raising expectations may be right for some time, but the concrete means are worth discussing. Successive sharp hikes in interest rates have had some effect, but the October composite CPI growth rate is still at a high 7.7 percent, still some way off the Fed’s regulatory target of 2 percent inflation. The inflation issue is still the central decision-making basis of the current Fed.
During the Fed’s interest rate decision meeting in early November, Fed Chair Jerome Powell called for the tightening policy to remain in place until the inflation target is met. With all these uncertainties, the US decision to continue raising interest rates is questionable. Amid a slowdown in rate hikes, tighter monetary and fiscal policy could be the next step.
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