Concerns about an economic downturn are increasing
Roubini expects severe recession
US Federal Reserve raises key interest rate by 0.75 percentage points as expected
The US Federal Reserve continues its fight against high inflation. Last week, the Fed raised interest rates again by 0.75 percentage points. The key interest rate is now in a range of 2.25 to 2.5 percent. Overall, it was the fourth rate hike this year. The US Federal Reserve raised interest rates by 0.75 percentage points in June.
The Fed intends to continue its tightening course and raise the key interest rate further in the future. The comment on the interest rate decision stated that additional interest rate hikes were appropriate. US Federal Reserve Chairman Jerome Powell was determined and stated that the key interest rate could also rise a third time by 0.75 percentage points or, if necessary, even more. Such a step is already possible at the next regular time in September. The decision on this, however, depends on the economic development up to then.
Concerns about the upcoming recession
As interest rates rise, so does market concern about an impending recession, as interest rate hikes make borrowing more expensive and curb demand, which helps lower inflation but also weakens economic growth. Fed Chair Powell also acknowledged that the fast pace of monetary tightening will have an impact on economic growth, so over time there may be a need to slow it down. According to the German Press Agency, the Fed’s statement said that signs of economic slowdown are already being seen. Overall economic spending and production have recently weakened somewhat, but the situation on the labor market remains robust.
The day after the Fed’s interest rate decision, it was announced that the US economy had already slipped into a technical recession – economic activity had contracted for two straight quarters. Gross domestic product fell by 1.6 percent in the first quarter, while, as the Ministry of Commerce announced in an initial publication, it fell by 0.9 percent from April to June compared to the previous quarter and extrapolated for the year.
Nouriel Roubini expects a severe recession
One of the experts who sees a high probability of a recession, according to TheStreet, is ex-Treasury Secretary Larry Summers. He found that at no point in the past 65 years has inflation been above 4 percent and unemployment below 5 percent, and the economy has not then entered a recession within the next two years.
But while Summers and most other recession-seeking economists are expecting a mild recession, “Dr. Doom” Nouriel Roubini is expecting a severe recession. “There are many reasons why we are going to have a severe recession and a severe debt and financial crisis,” Roubini recently told Bloomberg. “The notion that this will be brief and superficial is utterly delusional.”
In an article published by Project Syndicate at the end of June, konom compared the current situation with the crashes of the 1970s and 2008 and stated that the next crisis would not be like its predecessors. “In the 1970s we had stagflation but not massive debt crises because debt was low. After 2008 we had a debt crisis followed by low inflation or deflation, because the credit crunch triggered a negative demand shock. Today we face supply shocks in a context of much higher debt levels, which means we are headed for a combination of 1970s-style stagflation and a 2008-style debt crisis – ie a stagflationary debt crisis,” wrote Roubini.
The economist therefore expects that US stocks will not recover from the current market, but will “most likely fall lower”. “After all, in typical 08/15 recessions, US and global stocks tend to fall about 35 percent,” Roubini said. “But since the next recession will be both stagflationary and accompanied by a financial crisis, the stock market crash could be closer to 50 percent.”
It now remains to be seen whether the US Federal Reserve will maintain its pace of monetary tightening, how the economy will develop in the coming months as a result and whether Roubini’s fears will actually materialize.
Editorial office finanzen.net
Image credits: Vivien Killilea/Getty Images for Berggruen Inst., Immersion Imagery / Shutterstock.com