Powell, To Increase Rates Or Not To Increase

CEOs, Vice Presidents, General managers, Government officials, and the majority of central bank governors agree that recession might be just around the corner. However, the trigger of the possibility of a recession is changing and shifting from one direction to the other.


The federal reserve has been trying to fight the increases in inflation since the beginning of the year 2022. However, currently, the fight is not just facing one enemy, it is rather 2 enemies, the other being recession.


U.S. Federal Reserve chair Jerome Powell was testifying in front of the U.S. Congress on the 22nd of June 2022. In his testimony his tone was aggressive similar to the previous testimonies, however, something changed. He announced that they are fighting with all the tools available to pull back inflation towards 2%, though, the new risk is the fast landing.


Generally speaking, when an economy is signaling a possible recession, while also having high inflation rates, there is truly not many positive solutions in hand as far as monetary tools go. And that is why transparency in the strategy of recovery is critical to the public.


We are talking about stagflation, which has been circulating at an increasing pace in the past couple of months. This is where Powell stressed in his testimony, saying that a soft landing for inflation is very challenging, especially while having commodity prices and in specific oil prices at such high levels.


What should be done now is to monitor the tone of the federal reserve, will they be focusing on fighting inflation by increasing rates at high paces, or they will not be able to be that aggressive, given that such a pace will fuel up recession. He mentioned saying “We are strongly committed” to bringing down inflation back to the 2% level.


This will bring high volatility to the markets, especially if we notice the most recent movements. The U.S. indices are pricing in every rate increase in a consequent decrease in value, however, after the pricing, we see a possibility for recovery, which acted like a bull trap mostly.


This means that the economy is trying so hard to fight against the aggressiveness of the federal reserve, especially since retail sales in most developed countries started to decrease gradually, which proves that inflation is being sensed across the global economy.


Consumer confidence in the U.S. market is decreasing to all-time lows, testing the 50 level (Figure 1). If we compare this to the subprime mortgage crisis back in the year 2008, we notice that consumer confidence went down to the level of 55.24.


That led to a decrease of approximately 40% in the S&P 500. Keeping in mind that the trigger was already present. Currently, as mentioned CC reached 50, while S&P 500 fell around -23%. This might alert us that the drop that already has occurred in the market alongside the drop in CC is not even comparable yet to the drops back in the year 2008.


Figure 1: TradingView, United States Consumer Confidence vs S&P 500


We have Deutsche Bank, Elon Musk, and many others on one side, and President Biden and Jerome Powell on the other side. Is the recession really coming as many expect, or will the complex tools used by the federal reserve tame inflation while promising a soft landing?


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