January 2001. The tech bubble has burst a few months ago. The stock market crash and interest rate hikes in 1999 and 2000 put the economy in jeopardy. Recession knocks at the door. Alan Greenspan, then chairman of the Federal Reserve, decided to reduce the cost of money by 1.5 basis points, from 6.50% to 5.00% in the first quarter. In his fight against inflation, Jerome Powell is now preparing to set the highest rates for more than 22 years. The big question is whether this will lead to a recession or a hint of a soft landing.
The US central bank took a breather in June from the most aggressive monetary policy tightening since the 1980s. It has raised rates five basis points to the current 5%-5.25% range in 10 consecutive hikes from March 2022 to last May. The minutes showed that many members of the Fed’s monetary policy committee were not even in favor of taking a break from the last meeting.
Reading that document has fueled the view that the Fed will raise rates again on July 26, despite the fact that job creation slowed a bit more than expected in June and that inflation is below 4% this Wednesday due to a base effect. may be below.
“Job growth slowed more than expected in June and wage growth saw a significant deceleration compared to the previous two months. However, the slowdown in job growth is not enough to prevent a rate hike at the Federal Open Market Committee meeting later this month, especially as indicators show that market conditions for labor rates are slowly easing. But remain stable,” say analysts at Oxford Economics. “We expect the Fed to raise rates twice more, 25 basis points each, in July and September,” Bank of America said on Friday.
One of those 0.25 percentage point increases would be enough to surpass 2007’s 5.25%, this time with another bubble bursting in real estate. The years 2000–2001 and 2006–2007 were the last years in which interest rates exceeded 5%, and in both cases recessions occurred. Will history repeat itself or will Powell be able to emulate the Greenspan of 1994, who achieved the long-awaited soft landing?
At present, the recession has not come yet. “I’m hearing every month that there’s going to be a recession next month,” Biden said in late June. “I don’t think that’s the case,” he said.
Most economists are delaying the timing of the recession. Those at Bank of America acknowledge that “the latest data has taken the growth by surprise”, but they insist that the shock will come. “The housing sector is showing a slump, and auto sales and production have picked up as supply constraints ease. Although these rate-sensitive sectors have outperformed expectations and the overall economy is growing in line with this trend, we believe there are ample sources of concern for a mild recession starting in the first half of 2024. basis, Bank of America said in a report on Friday signed by Michael Gapen, the bank’s chief US economist.
Bank of America says it doesn’t think the still-pending small rate hike will be the straw that breaks the camel’s back. “We think the US economy has not yet felt the full impact of the 500 basis point rate hike since last March.” They recall that during the financial crisis, when imbalances in the economy were high, the Federal Reserve last raised rates in June 2006, and yet the recession did not begin until a year and a half later.
Fed experts also maintain a base scenario of recession. His prognosis is that amid already tight financial conditions, the expected impact of further tightening of bank lending conditions will trigger a mild recession later this year, followed by a moderate recovery. Technical services advising the Monetary Policy Committee expected a slowdown in real GDP in the second and third quarters of this year, before a modest decline in both the fourth and first quarters of next year.
That said, they acknowledge that the uncertainty remains high. In fact, the major difference between the latest published minutes and previous meetings is the acknowledgment that “given the strength of labor market conditions and resistance to consumer spending, experts considered it likely that the economy would continue to grow more slowly and avoid Will be able to go.” The probability of a recession was about the same as in the baseline scenario of a moderate recession.
Alan Greenspan, who chaired the Federal Reserve from 1987 to 2006, recounted in his memoirs that one of his greatest successes was achieving the long-awaited soft landing with the 1994 rate hike. He points out that the term was not even used in the Fed at the time, but was a term derived from the space race between the United States and the Soviet Union in the 1970s. Greenspan tried to repeat this maneuver in 2000–2001, but was unable to avoid a recession.
Powell does not have Greenspan as a reference, but rather his predecessor, Paul Volcker. “Who isn’t a fan of Paul Volker? In this regard it should not be taken apart. But I know him a little bit and I have a lot of admiration for him,” she replied when asked about him in May last year, noting that the man who served as chairman of the Federal Reserve between 1979 and 1987 He had the courage to do so. What he thought was right. It was the right thing”. What it did was beat inflation at the cost of causing a recession. Powell is keen to follow suit.
Division and consensus at the same time
The minutes of the Federal Reserve’s last meeting have raised some doubts as to how to interpret the fact that some participants in the meeting were in favor of raising rates and yet, unanimously approved the decision to hold back. Went. According to the document, taking into account the cumulative tightening of monetary policy and the lag that affects economic activity and inflation, almost all participants types shall be deemed appropriate or acceptable to maintain. instead, “Some participants indicated that he was in favor of raising the federal funds rate by 25 basis points at this meeting or that he could support such a proposal.”
Despite these differences, the increase was approved unanimously by 11 votes against 0. The central bank’s Federal Open Market Committee (FOMC) has 12 voting members (now 11, because there is a vacancy): seven members of the Federal Reserve Board (now 6), the president of the Federal Reserve Bank of New York, and four other regional Federal Reserve President of Banks. These final four are rotated every year along with the other seven, who do not have the right to vote that year, but who attend the meetings.
It is therefore possible that the participants defending the rate hike in June were among those who did not have the right to vote. However, it is also possible that after defending that position and being in the minority, they decided to close ranks and approve the decision to stay to give an image of unity. It is not disclosed for minutes.
