Federal Reserve Chairman Jerome H. Powell acknowledged in congressional testimony that higher interest rates could lead to a recession, saying it was “certainly a possibility.” Last week, the Fed introduced a percentage point jump of three-quarters, its largest increase since 1994, as part of an aggressive strategy to rein in decades-high inflation.
The Fed chair acknowledges that higher interest rates could cause a recession
On Wednesday, Powell told lawmakers on the Senate Banking Committee that the Fed is determined to beat back soaring inflation. “We understand the hardship is causing high inflation,” he said. “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the solution it will take to restore cost stability to our families and businesses. “
Inflation reached a new peak in May – climbing 8.6 percent year-over-year – signaling that the Fed’s policies to contain soaring costs of food, fuel, housing and other necessities are not yet having a robust impact. That has shaken the confidence of both consumers and investors and underscored a recession of growing likelihood.
Citing higher interest rates and lower consumer demands, analysts at Citigroup and Deutsche Bank predicted 50 percent odds for a coming recession.
But the Fed is unlikely to see interest rates without clear evidence that the economy is calming, Powell said during his testimony before the House Financial Services Committee Thursday.
Investors have a number of economic data points to parse through. The yield on the benchmark US 10-year Treasury note plunged to 3.02 percent, its lowest in two weeks. Bonds yields move conversely to prices.
In the manufacturing and services sector, the US Manufacturing Purchasing Managers’ Index dropped to 52.4 in June compared to 57 in the prior month. The Services PMI fell to 51.6 from 53.6 in May. The index is released by S&P Global after surveying over 300 business executives, where respondents rate metrics such as output, cost and employment, offering insights into business conditions. Naeem Aslam, chief analyst at AvaTrade, said the declining numbers would push investors further to the edge.
“The survey data is consistent with expanding the economy at an annualized rate of less than 1% in June, with the goods-producing sector already declining and the vast service sector slowing sharply,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, in a report. As hundreds of households cut back on nonessential goods and activities – such as travel and dining, producers saw the first contraction in new orders from July 2020.
Employment was curtailed because of both supply and demand challenges. The S&P Global report said manufacturers and service providers found it difficult to hire or retain workers, while the declining consumer spending made employers hesitant about replacing goers.
Americans are starting to pull back on travel and restaurants
New jobless claims fell by 2,000 to a seasonally adjusted 229,000, according to new data released Thursday by the Labor Department, indicating that the number of Americans filing for unemployment benefits has remained stable for the year. Following a widespread proxy for layoffs, the level of jobless claims will be closely scrutinized for a weakening labor market, as the Fed pursues a more aggressive monetary policy and fears a potential recession will grow.
To home buyers, the rising cost of borrowing has overstretched an already challenging housing market. Freddie Mac’s latest data showed that the weekly average 30-year fixed-rate mortgage – the most popular home loan product – rose 5.81 percent, more than double what it was a year ago. The combination of rising mortgage costs and high housing prices, which reached $ 428,700 on average, could force a decline in sales.
“However, in reality many potential home buyers are still interested in purchasing a home, keeping the market competitive but leveling off the red-hot activity of the last two years,” Freddie Mac analysts wrote.
Mortgage costs $ 128,000 more over 30 years for a $ 250,000 home