• Again rate hike In early May the Federal Reserve or pause
• Jeffrey Gundlach: “We need a higher unemployment rate”
The US Federal Reserve (Fed) has raised interest rates nine times in a row since last year in the fight against high inflation. This is now five percent, and another increase of 0.25 percentage points at the beginning of May cannot be ruled out. But the American economy is suffering – credit is becoming more expensive and demand for products and services financed with credit is falling.
Added to this is the turbulence in the banking sector. One reason for the bankruptcy of the Silicon Valley Bank is the sharp rise in interest rates on loans. Investor and businessman Jeffrey Gundlach says in an interview with CNBC that consumers have realized that banks are not paying the market-suggested 4 percent interest on their deposits, so they are diverted to other investments. He also predicts an impending recession in a few months.
US inflation falls – still far from Fed target
The Department of Labor in Washington announced a few days ago that the US inflation rate was five percent in March. In contrast to February, when it was still six percent, it has fallen further, but is still a long way from the central bank’s 2 percent target.
It is therefore questionable what the Fed will decide at the beginning of May: another rate hike or a pause. “The odds are 50/50,” Gundlach tells CNBC. He was sure that the central bank might only take a break because of concerns about lending. Because one thing is clear: if the base rate is increased by a further 0.25 basis points, interest rates on loans will also rise.
US central bankers see “slight recession”
Shortly after the collapse of the Silicon Valley bank, Fed bankers at their March 21-22 meeting agreed that US economic growth would slow. This is shown in the minutes published a few days ago. Due to the banking turmoil, members see a slight recession coming, so a pause in rate hikes is being considered. Analysts and market participants are also speculating on a break.
Bond expert Gundlach told CNBC: “The Fed has to fight either inflation or recession. They can’t do both”. He firmly believes that the recession will hit the US in a few months. “All we need is a higher unemployment rate,” the bond king told Bloomberg.
Inverted yield curve as an indicator of recession
The inverted yield curve occurs when short-term bonds yield more than long-term bonds. In the US, 2-year Treasury bonds currently yield about 0.5 percent more than 10-year bonds. Investors therefore expect interest rates to fall. Is this a sure sign of a recession?
The financial editor of Handelsblatt, Leonidas Exuzidis, explains in a podcast episode that the inverted interest rate curve was considered a sure sign of an imminent economic downturn in the past. Because every recession since 1960 has been preceded by a yield curve inversion, followed by a recession within 24 months. Only 1967 was an exception.
Editorial office finanzen.net
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