Combating inflation without causing recession

Fed executives' guidance. Inflation data remained stubbornly high despite signs of easing inflation pressures as import prices fell, supply chain slackened and retailers refilled shelves. This has helped feed a steady stream of statements by Fed officials that they can't give up yet.

Fed officials got this very wrong in 2021. There were factors they could not foresee, such as Russia's invasion of Ukraine, which confused supply chains and pushed up energy and commodity prices. But other shocks may be lurking around the corner.

“I can totally understand their shyness,” said Omair Sharif, head of Inflation Insights. 'You don't want to say there's light at the end of the tunnel until you're sure there really is light at the end of the tunnel.'

FT's Colby Smith: “Fed officials have signaled that they are more concerned about doing too little to rein in US inflation than doing too much, and they have doubled down on their plans to tighten monetary policy, thus slowing the economy, according to recent reports.”

It is unclear how long these conditions will last. Third-quarter earnings reports may provide some clarity. From Peter Eavis and Joe Rennison of the NYT: “Many investors are concerned that the Fed's determination to tame inflation and cool the economy will beat company performance so far… This could prompt companies to lay off workers and cut investments in the coming months. This will increase the likelihood of a recession in the United States.'

Employment and CPI situation. In September, the consumer price index increased by 0.4% seasonally adjusted and 8.2% seasonally adjusted in the last 12 months. All items except food and energy index increased 0.6% in September (SA) and 6.6% year-on-year (NSA).

The US economy added 263,000 jobs last month, a moderation from the previous edition, but still a strong hiring figure as the unemployment rate dropped to 3.5%. The weaker-than-expected decline in employment earnings dashed investors' hopes that FOMC members could leave monetary tightening sooner than expected.

 Is it already in a recession? The National Bureau of Economic Research is the official arbiter of recessions and uses multiple factors when making its decision. NBER defines the recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.” However, the bureau's economists admit that they don't even use gross domestic product as their primary barometer.

GDP fell in both the first and second quarters, and the first reading for the third quarter is scheduled for October 27.

“There is still good strength in the labor market and this will allow the Fed to remain aggressive in tackling inflation,” Edward Moya, senior market analyst at OANDA, a New York-based currency firm, told Al Jazeera.

More than eight in 10 CEOs recently said they expect a recession in the next 12 months, according to a new survey by accounting firm KPMG. Of the 1,300 CEOs in the world's largest companies surveyed by KPMG, 73 percent said they believed the economic downturn would disrupt growth. According to KPMG, about 39% of CEOs decide to freeze hiring, while 46% are considering shrinking their employee base in the next six months.

Emerging markets will suffer if the US enters a prolonged period of slow growth. If US demand weakens over an extended period of time, major exporters to the US such as China, Mexico and Canada will suffer. As for how severe a US recession could be, Moya echoed the sentiments of many of the economists Al Jazeera spoke to: 'We don't know exactly how sticky inflation will be, and how resilient the economy is.'

Aggressive policy stance. The US jobs report pointed to a tight labor market, which supports the Fed's ongoing aggressive monetary policy tightening campaign.

The U.S. consumer price index (CPI) rose 0.4% last month after rising 0.1% in August, the Labor Department said. In the 12 months until September, CPI increased by 8.2% after an 8.3% increase in August.

David Meger, director of metals trading at High Ridge Futures, said the data indicate that the Fed will be more aggressive in tackling inflation by raising interest rates faster, putting pressure on gold.

In a note, Kitco Metals senior analyst Jim Wyckoff said Fed officials' reiterated their aggressive hawkish stance on monetary policy has made the market nervous over fears of 'a pending US and/or global recession.'

Evaluation of Fed minutes. According to the minutes of the 20-21 September meeting, policy makers revised their rate hike expectations higher, but some gave warning signals about overdoing the risks of economic and financial volatility.

'Many respondents stressed that the cost of taking too little action to reduce inflation likely outweighed the cost of taking too much,' the minutes said.

Ellen Zentner, chief US economist at Morgan Stanley, said in a report Wednesday that the minutes show the Fed will likely raise 0.75 percentage points at its November 1-2 meeting. 'The minutes reaffirm the clear commitment to stay on the path of aggressive policy tightening and maintain this high for longer, even as risks of over-tightening emerge.'

The Fed has raised the benchmark fed funds rate from near zero to the range of 3% to 3.25% five times this year; This is the fastest rate increase since the early 1980s to combat inflation, which is close to 40-year highs. Officials approved rate increases of 0.75% at each of their last three meetings.

Conclusion? A US recession would cause deep pain in the developing world. The UN agency has issued a serious warning that a global slowdown could potentially wreak havoc worse than the 2008 financial crisis and the 2020 COVID-19 shock. However, this does not appear to be the case yet as the labor market is strong.

Emerging markets will suffer if the US enters a prolonged period of slow growth. If US demand weakens over an extended period of time, major exporters to the US such as China, Mexico and Canada will suffer.

As for how severe a US recession could be, Moya echoed the sentiments of many of the economists Al Jazeera spoke to: 'We don't know exactly how sticky inflation will be, and how resilient the economy is.'

Kaynak: Tera Yatırım-Enver Erkan
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