Raising interest rates increases the possibility of a recession in the US economy
An economic analysis expected, today, Saturday, that strong activity in the United States of America, coupled with tight labor markets and low spare capacity, will lead to another wave of high inflation, forcing the Federal Reserve (the US Central Bank) to undertake more rounds of raising interest rates.
The inflation rate in the United States continued to rise in August, for the second month in a row, as the Department of Labor said, last Wednesday, that the consumer price index, one of the main components of measuring the inflation rate, jumped by 3.7% on an annual basis, and 3.2% in… July.
Qatar National Bank (QNB) said in its weekly report that “there are currently enough imbalances in the American economy, which may prevent a soft landing, and ultimately lead to a recession during the second half of 2024.”
According to the Qatar News Agency (QNA), the report indicated that the growth of the US economy has exceeded expectations in recent months, but there are some indicators that tend to trigger warning signals before any problem occurs.
The report expected growth in the United States to reach 4.1% in the third quarter of 2023.
The report added that US Treasury bonds, which are affected by macroeconomic developments, indicate a more complex context, as the standard spread between 10-year Treasury bonds and federal funds interest rates turned to a negative level in December 2022, before declining further into negative territory in the months. Finally, this record difference is a major indicator of recession.
He pointed out that lower long-term returns mean lower growth expectations, and higher short-term returns mean tightening monetary policy. This signal appeared before the last seven recessions that occurred in the United States since the early 1960s, and it serves as a warning that precedes the start of the recession by a year or two.
Federal Reserve Chairman Jerome Powell said last Friday that the central bank is ready to “increase interest rates if necessary” and will continue its tight monetary policy until inflation moves towards the set target of 2 percent.
The Federal Reserve has raised interest rates 11 times since last year, in an attempt to curb the inflation rate, which is still higher than the target rate of 2%.
The bank’s report believes that with stable growth and moderate inflation, investors and analysts are moving towards an optimistic stance, which means that the United States can avoid a recession.
According to the report, the central bank’s ability to carry out a sophisticated tightening operation that confronts inflation and avoids recession is “an overly optimistic position,” noting that historical experiences confirm that the central bank did not succeed in containing runaway inflation while achieving a soft landing.
He noted that during previous tightening cycles, monetary policy measures were either not strong enough, leading to devastatingly high inflation, or quickly became too tight, leading to a more pronounced economic contraction.
2023-09-16 11:56:59
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