Fed’s rate hikes risk U.S. recession

Weekend reading:
The Annual Report of the Board of Governors of the Federal Reserve System.
😀😀😀😀https://t.co/XOzyDiCNqC#economy #markets #centralbanks #federalreserve #fed #econtwitter

— Mohamed A. El-Erian (@elerianm) August 16, 2024

The Federal Reserve’s consecutive lifting of interest rates is likely to cause the U.S. economy to fall into a recession rather than cooling down inflation, said Radhika Desai, a professor of political studies at the University of Manitoba in Canada. After 11 rate hikes by the Fed from March 2022 to July 2023, the target range for the U.S. federal funds rate has risen to between 5.25 percent and 5.5 percent and has remained unchanged at this two-decade high. Desai, also a visiting professor at the London School of Economics and Political Science, said in an interview that raising interest rates is not a practical solution for inflation as it will dampen demand. “The Federal Reserve has only one instrument: interest rate and monetary policy. When all you have is a hammer, every problem looks like a nail.

Current Market expectations for Fed Rate Cuts…
-Sep 18, 2024: 25 bps cut to 5.00-5.25%
-Nov 7, 2024: 25 bps cut to 4.75-5.00%
-Dec 18, 2024: 50 bps cut to 4.25-4.50%
-Jan 25, 2025: 25 bps cut to 4.00-4.25%
-Mar 19, 2025: 25 bps cut to 3.75-4.00%https://t.co/l5IYmkeySJ pic.twitter.com/EnbM8dbb6v

— Charlie Bilello (@charliebilello) August 16, 2024

They use the only instrument they have against inflation, but the real cure is not to increase interest rates, which simply creates a recession strong enough to dampen demand,” said Desai. Desai highlighted that rate hikes threaten the financial sector and asset markets by impeding trading activities.

🇺🇸 #Fed Faces New Peril as It Navigates Both Inflation and Job Risks – Bloomberghttps://t.co/8vrzX7v8Fw pic.twitter.com/PTyRAA1nVM

— Christophe Barraud🛢🐳 (@C_Barraud) August 18, 2024

Fed’s interest rate impact

“The real consideration of the Federal Reserve when raising or lowering interest rates is its effect on the financial sector. Many people are calling for easing interest rates because the increase is threatening asset markets. These markets rely on leverage trading, allowing people to borrow money cheaply and use it to profit, which is threatened when interest rates rise,” she said. She emphasized that the U.S. economy is on the verge of a recession similar to the 2008 crisis, as the interest rate has reached 5.25 percent. “The last time the Federal Reserve raised interest rates to this level in the mid-2000s, it pricked the housing and credit bubbles in 2008. We are already at that level and have seen signs of a crisis. The financial sector is more regulated and resilient, but not by much. I think a recession is imminent and could occur before the next U.S. elections,” Desai remarked.