So is it a recession or not? Gross domestic product fell at a 0.9% annualized rate in the second quarter after a 1.6% decline in the first three months of the year. This means that the US economy shrank for a second straight quarter, which technically means a downturn. But the obscure panel of economists actually in charge of declaring whether there is one or not says the nation isn’t there yet.
At the Fed meeting earlier this week, Fed Chair Jay Powell stated ‘‘We are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data-dependent going forward.’’ The neutral rate is the prevailing rate at which the economy delivers its potential GDP growth rate — without overheating or excessively cooling down. With this 75-bp hike, Powell told us the Fed just reached its estimate of a neutral rate and, hence, from here they aren’t contributing to economic overheating anymore. But that also means any further increases are going to put the Fed in an actively restrictive territory.
The stock market rose following the Fed Chair’s comments and finished sharply higher on Friday with strong tech earnings helping to lift sentiment and take the focus off high inflation data.
But, have we really staved off recession and inflation?
Future Wealth’s View
It is nice to see the markets rally once again this week but is it for the wrong reasons? That is the real question. The Fed has got it wrong so many times in the last 12 months that one has to wonder if they got it wrong again. The moment of truth will be when the CPI data for July is released in early August. If inflation drops materially from July’s reading of 9.1%, it will lend credence to Fed’s neutral rate comment. Else, the Fed will once again have to eat crow and raise it one more time in September (there is no Fed meeting in August).
With the benefit of 2 months of data, in September, the Fed could dance around its mistakes and continue to raise rates or state that it was too early in calling a victory over inflation. What was striking in Powell’s comments on the call earlier this week was that the Fed ditched providing forward guidance. One has to wonder why the Fed would stop providing forward guidance when they seem sure about having reached equilibrium in interest rates. Not everything seems to be going well at the Fed lately. Wouldn’t you agree?