Fed begins to signal recession fears


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(MENAFN – Asia Times) NEW YORK – In the past 48 hours, the tone of the Federal Reserve has turned “hawkish,” Federal Reserve Chairman James Bullard said on June 18, prompting the fifth decline in US stock market indices at large. a row.

Bullard told CNBC: “We are expecting a good year, a good reopening. But it’s a bigger year than we expected, more inflation than we expected. ‘It’s only natural that we’ve leaned a little more hawkish here to contain inflationary pressures.’ ‘

The St. Louis Fed chief has suggested the Fed may hike interest rates in 2022, rather than 2023, as the Federal Open Market Committee hinted at at its Wednesday meeting.

What is the Fed afraid of?

At some point, inflation always leads to recession, when consumers cannot afford higher prices and businesses cannot maintain profit margins in the face of rising input costs.

Consumer price inflation rose at an annual rate of 8.7% in May, while wages are increasing by 3% per year. Double-digit increases in home and used car prices haven’t started to make their way into official inflation data, but consumers are hurting.

Retail sales, as we noted on June 17, fell in May, by 1.3% in nominal terms and 2% in real terms.

In this chart of the day, we see evidence that the gap between prices paid by manufacturers and prices received from customers is depressing production. The Philadelphia Federal Reserve has conducted a monthly survey of manufacturers, who report changes in the prices of their inputs and outputs.

The difference between the proportion reporting higher prices paid for inputs and the proportion reporting higher prices for finished products is shown below. Note that the sharp drops in this gauge coincide with the major recessions of 1979, 2000 and 2009.

We are also seeing a reverse movement in recent years between the prices paid versus the difference received and the measure of new orders from the Philadelphia Fed.

The Philadelphia Fed diffusion index for orders is down to 22 from a high above 40, suggesting slower but still positive activity.

The problem is that the difference between the prices paid and the prices received results in future activity with a lag of up to 18 months. As shown in the bar chart below, past values ​​of the paid / received difference are highly correlated with current values ​​of the overall Philadelphia Fed activity index – and this effect lasts for about ten years. eight months.

None of this is new to Fed economists, who gathered this data in the first place. The Fed may have looked at last month’s numbers and now fears that the spike in inflation it did not anticipate could quickly lead to economic weakness.

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