The Federal Reserve confirmed some investors’ worst fears yesterday and hiked interest rates 75 basis points. That’s the Fed’s first 0.75% interest rate increase since 1994, and it underscores how dire this moment is for the economy. Consumers are struggling to make ends meet as the price of gas, groceries, and housing all skyrocket. The Fed is trying to curtail this problem by slowing inflation, but the market is remaining stubbornly unresponsive to the central bank’s measures.
Some analysts now worry that a recession is the only way out of surging gas prices. While some Americans are blaming the White House and Big Oil for soaring gas prices, the oil industry claims that prices are high because of refinery bottlenecks. The industry’s biggest players say they cut back production throughout 2020 due to reduced demand, but the combined war in Ukraine and global shipping crisis has coalesced with inflation to push the price of gas to above $5 per gallon nationally.
The stock market is flagging this morning after the Fed’s meeting. The S&P 500, which gained 1.5% Wednesday, has lost 2% today as investors weigh recession fears. The Nasdaq also dropped over 2% Wednesday morning on the same fears, and the Dow Jones lost 600 points just after the start of trading. So far, this year has been extremely harsh for investors.
Fed Hikes Interest Rates
The US Federal Reserve believes that inflation will slow down if the economy cools off and demand falls. To curtail demand, the Fed is implementing a series of interest rate hikes, which will make borrowing more expensive for large companies and individual investors alike. This is a tried-and-true strategy, but it’s showing no signs of slowing inflation this time around.
Yesterday, the Fed initiated its first 75 basis-point hike since 1994, an unprecedented move for the central bank. The Fed will meet again in the last week of July, and Chair Jerome Powell has indicated the central bank is now targeting a more aggressive interest rate by the end of the year than they’d indicated in March. Borrowing costs will likely hit 3.4% by December, compared to the 1.9% the Fed had suggested back in March.
The central bank seems to have changed course in light of university-driven surveys indicating the lowest consumer confidence ever recorded among US consumers. A recent Department of Labor Statistics report shows that inflation was worse than expected throughout May, despite the Fed’s ongoing quantitative tightening and interest rate increases. This has convinced the central bank to move even more aggressively, but their actions could spur a recession before cooling demand enough to curtail inflation.
Recession Fears Return
The pressures on the US economy will likely metastasize into a recession before things stabilize. Stewart Glickman, an energy equity analyst at CFRA Research, says a recession is likely the only way out of soaring gas prices, too. “If we’re going to get US gasoline prices to fall, it’s probably not going to be a supply-driven solution. The solution here, unfortunately, is probably a recession that kills demand and reduces scarcity of supply.”
Experts now say that demand will need to drop before prices can stabilize because everything from oil to consumer goods s currently facing supply shortfalls. It’s difficult for companies to ship enough products to meet demand, and US consumers have shown little sign of slowing their spending–until recently, at least. Gas prices over $5 per gallon nationally seem to have put a damper on the usually-active summer spending season.
“We may see the national average slip to less than $5 [per gallon] in coming days,” says OPIS global head of energy analysis Tom Kloza. “The market is seeing some demand destruction and it may be that July will be the only month where driving is anywhere close to normal. Don’t be surprised to see some slippage in prices this week.”
Jobless Claims Rise, Economy Slows
Market experts say the signs of a looming recession are becoming clearer. For example, jobless claims are rising as the economy slows and the US dollar continues to fall. Unemployment insurance filings last week added up to 229,000, a smaller number than the week before but still above expectations.
Now, the problems are mounting for the economy. “The Summary of Economic Projections (SEP) and Chair Powell’s presser highlighted a Committee that sees an increasingly narrow path to a soft landing, while still maintaining that as a baseline,” says Deutsche Bank’s chief US economist, Matthew Luzzetti.
“The statement removed the reference to maintaining a strong labor market as inflation is brought under control and the SEP anticipates that the unemployment rate will eventually rise by about half a percentage point. We continue to anticipate that the Fed will have to move more aggressively than signaled at [Wednesday’s] meeting and that this tightening will trigger a recession in 2023 that leads to a more material rise in the unemployment rate.”