Concerns about a recession in the US are growing. Bloomberg said on the 12th (local time) that there is a growing possibility that the US Federal Reserve (Fed) will make a policy mistake and cause an economic recession in a situation where the burden of dealing with inflation (inflation) that has soared to its highest point in decades is growing. ) were analyzed.
The U.S. Department of Labor announced on the 10th that the consumer price index (CPI) rose 7.5% year-on-year in January, the largest increase in 40 years since February 1982. The CPI had already risen 2.6% year-on-year in March 2021, exceeding the Fed’s inflation target of 2%, then soared to the 5% range in May, to the 6% range in October, and exceeded 7% from December last year.
Bloomberg noted that rising prices for more and more products are also fueling inflation concerns. It is pointed out that the rise in oil prices due to the rapid economic resumption after Corona may have led to the inflation in the early days, but now the prices of all products are rising. More than 90% of the commodities the CPI uses to calculate the index have risen more than the Fed’s target of 2%, according to Bloomberg Economics. David Wilcox, head of US economic research, said:
Rising wages for American workers are also of concern. Federal Reserve Chairman Jerome Powell said last month that he was “taking caution” to the risk that sustained real wages could put upward pressure on inflation. This is because if wage increases continue while the unemployment rate is only 4%, prices and wages will push up each other, which could lead to a prolonged inflation.
US President Joe Biden[사진=AP·연합뉴스]
As concerns about inflation spread in all directions, the pressure on the Fed to respond to the price problem through strong policy is growing. However, Bloomberg feared that if the Fed tightened too much in response to these pressures, it could cause a collapse in financial markets that had been accustomed to very accommodative monetary policy. In addition, the ‘better reconstruction’ policy, which is President Biden’s core strategy, which insists on economic reconstruction through social investment in the face of rising prices, also has difficulties in passing, which has also emerged as a detrimental factor for the economy.
Lawrence Lindsey, a former Fed director, who worked at the White House under former President George W. Bush, told Bloomberg there is a more than 50 per cent chance of a recession by the end of next year as the US financial markets collapse. “If policy makes a mistake, it will be a heavy burden,” he said. Former Treasury Secretary Lawrence Summers agreed with this view. “There is a 50% chance that a recession will start within the next 30 months,” he said.
The view that the Fed could raise interest rates by 0.5 percentage points at its regular meeting of the Federal Market Open Committee (FOMC) in March continues to grow amid high inflation. According to the Chicago Mercantile Exchange (CME) FedWatch, the Federal Funds (FF) interest rate futures market has a 0.3% chance of a 0.25 percentage point increase in the Fed’s rate hike at its March meeting and a 93.8% chance of a 0.5 percentage point increase. is reflecting On January 13, a month ago, the probability of a 0.25 percentage point increase was 79.0%, and the probability of a 0.5 percentage point increase was only 3.0%.
According to Bloomberg, a balance sheet contraction along with interest rate hikes will also have an impact on financial markets, but has not been sufficiently discussed. “I don’t think the stock market has taken into account the risks of shrinking the balance sheet,” said Gina Martin Adams, chief stock market strategist at Bloomberg Intelligence. “The market is just starting to talk about it.”
On the other hand, even if there are signs of an economic slowdown, it is not likely that the government will introduce fiscal policies to prevent it. Senator Joe Manchin, who is making it difficult for the Democrats to pass the bill by opposing President Biden’s ‘better rebuild’ policy, issued a statement again after the CPI was released in January, the highest in 40 years, expressing his opposition. “(Inflation) is causing real and serious economic pain that can no longer be ignored,” he said.
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