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In his speech on Wednesday, Federal Reserve (FED) Chairman Jerome Powell was less optimistic about the U.S. economic situation.
With a third consecutive 0.75% interest rate hike, the FED has signaled that it is willing to put a lid on inflation no matter what, even if it means a deeper recession.
While Powell hoped the FED could succeed in deflating prices without causing unemployment, according to The Wall Street Journal‘s economic analyst Greg Ip, no such thing has happened in the U.S. economy since World War II.
The Treasury yield, which measures annual interest rates paid on U.S. bonds, has reversed. One- and two-year bonds now pay higher interest rates than the 10-year yield. Such yield curve inversions have been the prelude to a U.S. recession since 1980.
Although the U.S. is already in a technical recession, the National Bureau of Economic Research —the agency that officially determines whether there is a recession or not— has yet to make a pronouncement. Official FED forecasts still estimate 1.3% growth by 2023.
Employment would be affected, according to FED estimates, and the unemployment rate would stand at 4.4 %. At present, unemployment stands at 3.7%. According to the latest data from the Department of Labor, the country is beginning to experience a slight increase in unemployment claims.
Fuel prices have begun to decline after historically high prices during the months of May through August, however, the cost of food and other services remains elevated.
Powell noted that “no one knows whether this process will lead to a recession or, if so, how significant that recession would be.” The central bank chairman also noted that the Board of Governors sees a rate hike as imperative and said, “I wish there was a painless way to do that. There isn’t.”
Markets had expected the interest rate to be between 3% to 3.25%, however, FED officials signaled that interest rates could end up as high as 4.6% in a year, well above their highest forecast in June of 3.8%.
In response to Powell’s announcement, markets fell sharply in Thursday trading. The Dow Jones fell 1 %, while the S&P500 was down 0.84 %.
Cryptocurrencies are more bullish than financial assets, and currencies such as Bitcoin posted a rise of more than 5 % during Thursday’s trading. However, Goldman Sachs points out that the cryptocurrency could fall to below $12,000 as the recession looms.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica