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The Fed May Push The U.S. Economy Into Recession

By Michael KramerMarket OverviewJan 14, 2022 06:05AM ET
www.investing.com/analysis/the-fed-may-push-the-us-economy-into-recession-200614744
The Fed May Push The U.S. Economy Into Recession
By Michael Kramer   |  Jan 14, 2022 06:05AM ET
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This article was written exclusively for Investing.com

Inflation rates for December showed no signs of slowing, with the Consumer Price Index (CPI) rising by 7% year over year, while the Producer Price Index (PPI) jumped by 9.7%. The big jump in both the CPI and PPI come as a surprise especially following a weaker than expected December ISM manufacturing report and prices paid index and a big slump in oil and gasoline prices in November. 

Historically trends favored some alleviation in inflationary pressure based on those factors, but now with oil back on the rise and other commodities like copper once again beginning to move up as the dollar weakens some. The significant risk to this economy is that inflation continues to push higher, ultimately pushing the US economy into a recession.

High Inflation Rates

While high inflation rates do not always lead to a recession here in the US, since the late 1940s nearly every significant spike in the consumer price index on a year-over-year basis has been associated with a significant US recession. While this time may be different, the odds seem to suggest it won’t be.

CPI Y/Y Change
CPI Y/Y Change

Tightening Monetary Policy

While the Fed is now working hard to get inflation rates down, it may be too little too late. The Fed is trying to tighten monetary policy, which kills the demand side of the economy, when the US economy is already expected to see its rate of growth slow. A recent Reuters poll shows that GDP growth in 2022 is expected to slow to 3.9% from an estimated growth rate of 5.6% and then slow further in 2023 to 2.5%. It would not take much from the Fed to overtighten and cause a contraction.

CPI Y/Y Change
CPI Y/Y Change

That is precisely what has happened before. Historically, higher inflation has led the Fed to aggressively increase the Federal Funds Rate in prior cycles starting in the 1970s. In each case, the combination of the higher Fed Fund Rate and a high inflation rate have led the US economy to fall into recession. This time seems it will turn out the same, as the Fed is now on a quest to raise rates in 2022 and the markets are beginning to price in as many as four rate hikes. 

Wages Fail To Keep Pace

Another area of concern is real wages. Recent data shows that when adjusted for inflation, wages fell by 2.3% in December compared to a year ago which is a sign that consumers' earnings are not keeping pace with the changing inflation dynamics of the economy. These wages have been falling when adjusted for inflation since May 2021.

Change In Adjusted Wages
Change In Adjusted Wages

Despite all this high inflation and the threat from the Fed to raise rates and taper the balance sheet, yields are not rising, especially on the long end of the curve. The 10-year is still trading around 1.75%. On top of that, the 2-year note still only trades for 90 basis points. This leads to flattening across the curve and suggests that the bond market is still having a tough time believing the Fed will be as aggressive at raising rates as the Fed implies. 

It could only mean that the bond market doesn’t think the Fed will get to raise rates as much as it says it will because the bond market sees a significant economic slowdown coming. While the yield curve isn’t flashing recession warnings yet, the spread between the 30-year and the 5-year is now trading at just 55 basis points and has flattened dramatically since May. Currently, an inversion doesn’t seem to be out of the question. 

This would weigh on equity markets, with stocks carrying high valuations that do not fully price in the odds of an aggressive Fed and are counting on 8% earnings growth over the next twelve months. But, if wages aren’t keeping up with rising inflation, that could put pressure on corporate earnings, slowing growth and causing multiple contractions, leading to further decline in equity values. 

It seems that history is about to repeat itself, again.

The Fed May Push The U.S. Economy Into Recession
 

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The Fed May Push The U.S. Economy Into Recession

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Comments (31)
Rajesh Kumar
Rajesh Kumar Jan 17, 2022 3:12AM ET
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Everyone says Recession is coming. People have stopped looking for jobs, and are living in forced retirement. Their source of income is Stock market. If Recession comes and market drops, people will default on their loans, default on medical bills, house payments, etc. Then Fed will print more money, people will get stimulus checks, etc and things will return to where it is now. So average person is not scared of recession, in fact they are waiting for next stimulus checks. Let Recession come.
ThaLa Chamidu
ThaLa Chamidu Jan 17, 2022 2:03AM ET
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can you help me
Kevin Wetzel
Kevin Wetzel Jan 16, 2022 5:20PM ET
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The time to act was several month ago, we will see a farther decline and inflation will hurt us even if we can stave off interest rates.
Tochukwu Kelvin
Tochukwu Kelvin Jan 16, 2022 5:20PM ET
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how you need it right
Jeff Page
Jeff Page Jan 16, 2022 2:41AM ET
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There seems to be no increase in productivity which will begin hurting profits as well.
Henry Moradpour
Henry Moradpour Jan 15, 2022 5:39PM ET
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Nice article
Tochukwu Kelvin
Tochukwu Kelvin Jan 14, 2022 10:56PM ET
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really
MK MK
MK MK Jan 14, 2022 4:42PM ET
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No way. The only risk is Russia tension
Juan Pablo
Juan Pablo Jan 14, 2022 4:17PM ET
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They always Follow once the cycle has turned down and will add liquidity once the cycle has already turned up simply beause they need maintain the illusion of power
MARCELO DASILVA
MARCELO DASILVA Jan 14, 2022 2:08PM ET
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Always blame the FED. Not the greedy billionaires putting money aside to wait for a big stock market crash so they can buy really cheap.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Jan 14, 2022 10:57AM ET
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Fed has to push economy into double recessions 4 consecutive quarters of negative growth to redeem itself of the grandiose sins committed
João Moreira
João Moreira Jan 14, 2022 10:45AM ET
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Soft landing (aka, FED acting to curb inflation slowly and cautiously) is the only way to achieve not only price stability but, much more important, to "pay out" the huge debt that the US had to sell to pay for the large deficit of the last years. It's actualy not that bad for the USA, it happened after WWII... If the FED brakes too hard and we have recession, the Debt/GDP ratio will raise to levels that are unsustainable, the debt would loose it's AAA notation, it would be a (global) disaster. They know it and they will never risk it.
Karl Kessler
Karl Kessler Jan 14, 2022 10:45AM ET
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As if the FED could control what is coming in the next few years simply by changing the price of the dollar. Wishful thinking in the extreme.
Philip moneytrondoctor
moneytrondoctor Jan 14, 2022 10:44AM ET
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Sure , they will ! At the third rate hike , the panic will take off !
Steve Peters
Steve Peters Jan 14, 2022 10:39AM ET
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Back to the days of economic stagnation under the Hussein Obama administration. Guess who was Hussein Obama's lackey VP? Quid Pro Quo Joe Biden. With the fraudulent Psychobabbler-in-chief at the helm, it should be no surprise that we are headed in this direction when only a short time ago our economy was booming!
ste tor
ste tor Jan 14, 2022 10:39AM ET
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they have no clue on how the economy works. Fact.
Lars Hellman
LarsH Jan 14, 2022 10:39AM ET
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ste tor  Exactly, Mr. Powell has no education in economics at all. He doesn't even know that inflation is caused by the money supply, nothing else.
Hoon Ko
Hoon Ko Jan 14, 2022 10:35AM ET
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But the later Fed acts, the stronger it would have to do.
Paco Garcia
Paco Garcia Jan 14, 2022 10:28AM ET
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Self-serving article of the many who don't want the FED to rise interest rates. This has gone-on for too long and has helped the financial markets and investors, but if this continues, real economy and average people will suffer. Am not surprised that the bond market does not buy into the interest story given the past years, but clearly hope this changes soon. The current monetary policy is not a good long-term strategy. It will ****the US economy harder the longer it takes to correct it.
Ralph Merry
Ralph Merry Jan 14, 2022 10:13AM ET
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Nice article. the results of this fed experiment will end with the government failing on making a soft landing and the recession we are due to have will occur.Governments usually fail no matter what party or religion is in power which is the truth to hold when the next savior steps in to run the show.
Casador Del Oso
Casador Del Oso Jan 14, 2022 10:07AM ET
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Great article!
Yankee Steve
Yankee Steve Jan 14, 2022 10:07AM ET
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The long term bond is signalling Fed mistske just like 2018. The Fed will reverse course
jason xx
jason xx Jan 14, 2022 10:05AM ET
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Never anything positive from this guy ever
Peter Murton
Peter Murton Jan 14, 2022 10:03AM ET
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The Fed (and government deficit spending) have been preventing recession for 13 years.  How long do you think that can continue?  Do you think all that pedal-to-the-floor stimulus is free?  At some point it has to stop, or the spring will stretch so far that the explosion will be too devastating to countenance.
Wayne Gillispie
Wayne Gillispie Jan 14, 2022 9:35AM ET
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Inflation doesn’t affect CEO’s, Congress, executives or anyone else bringing in $100K+ annually. Other than they might skip buying a new luxury car, boat, plane, helicopter or 3rd home under the business as a tax deduction. They might skip a month pulling out $50K in stock dividends or a work party or forego hiring another executive secretary or cancel one of many family vacations to Jackson Hole or Nantucket. We all know how it works boys.
Dominic Mazoch
Dominic Mazoch Jan 14, 2022 9:35AM ET
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Need flat national sales tax on everything. Including stocks and real estate. George Jesten easy to understand. Then all have skin in the game.
David Bud
David Bud Jan 14, 2022 9:14AM ET
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Good, it's long overdue. Healthy markets eb and flow, and this is not a healthy market.
Karl Kessler
Karl Kessler Jan 14, 2022 9:14AM ET
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It's not a healthy market because it's not a healthy economy. It's too top heavy and energy poor.
Ron Raymond
Ron Raymond Jan 14, 2022 7:44AM ET
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Been thinking the same thoughts myself, but also much worse coming down the line. Imagine if dems passed another bigger socialist bill what that will do eventually. I don’t really want to see us end up like Venezula or worst, but it’s probably too late. All alone I have said, soon there will only be the rich and the poor.
jason xx
jason xx Jan 14, 2022 7:44AM ET
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You dont mind chump trump spending 4X as much as Bidens spending bill giving tax cuts to the rich though. At least Bidens spending is an investment in the country.
ZM Qi
ZM Qi Jan 14, 2022 7:41AM ET
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You are right, we are recession
Pratt Man
Pratt Man Jan 14, 2022 7:38AM ET
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biden must reverse nearly all of trumps tariffs. we had to all pay for those eventually? 20% from China? it did nothing to curb imports and caused importers to pass those costs in to consumers.
Show previous replies (1)
Roberta Garrett
Roberta Garrett Jan 14, 2022 7:38AM ET
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keeping the dollar artificially high along with tarrif's under trump destroyed 100's of thousands of manufacturing jos in the US.
Peter ONeill
Peter ONeill Jan 14, 2022 7:38AM ET
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Ron Raymond  Guessing you've never read Adam Smiths - Wealth of Nations????? How you going to afford American goods only????? If the USA only bought USA goods inflation would be 200%+ not 7%....America importing Trillions of goods from low income, low-cost nations is one of the only ways to maintain prices. US unemployment is also already at 3.9% and 10.6 million open roles....where exactly are you going to get the employees to manufacture these American goods when US supply chains are already near saturation?
Peter ONeill
Peter ONeill Jan 14, 2022 7:38AM ET
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Ron Raymond  Plus if you reallyyyyyy want to look into the future you'd be asking how the **** did US grow its debt from $11 Trillion to $30 Trillion in 12 years - yet all projections are it for it to continue to grow higher constantly until it explodes. No one wants to tax companies as they say they create jobs/growth, no one wants to tax employees as that's a vote loser, yet everyone wants to continue spending. So you end up with a nonstop party with everything being put on the credit card. One of these days the US will wake up with a massive debt hangover and recession probably at 1929 levels - which it could take decades to recover from.
Wayne Gillispie
Wayne Gillispie Jan 14, 2022 7:38AM ET
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Peter ONeill That’s bull. When all of my goods starting getting manufactured in Mexico and then China, that cost savings was NEVER passed along to remaining workers or us consumers. For the last 40 years, increased profits went right into the greedy CEO’s and upper execs pockets.
Peter Murton
Peter Murton Jan 14, 2022 7:38AM ET
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Ron Raymond  "More made in America" = Inflation.
 
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