Investors Increasingly Fear US Recession as Federal Reserve Poised to Hike Interest Rates

© AP Photo / Richard DrewTrader Peter Tuchman works on the floor of the New York Stock Exchange, Friday, Dec. 28, 2018.
Trader Peter Tuchman works on the floor of the New York Stock Exchange, Friday, Dec. 28, 2018.  - Sputnik International, 1920, 15.03.2022
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Even before the US severed normal trade relations with Russia earlier this month, inflation was at a 40-year high and the Federal Reserve was all but certain to increase interest rates. However, the spike in oil prices has created a ripple effect amplifying existing trends.
A recent survey of top money managers, strategists, and economists by CNBC found that one-third of those surveyed believe that the US economy will enter a recession in the next 12 months, and half believe Europe will do so. The survey was conducted from Thursday through Saturday of last week.
According to CNBC, some of the expectations from the Federal Reserve, the US central bank, are dramatic: they expect the Federal Funds Rate to reach 1.4% by the end of 2022 and 2% by the end of 2023; at present the rate sits at 0.08%.
The FFR represents the interest rate at which depository institutions like banks and credit unions lend reserve balances to other banks on an overnight basis. The higher the rate, the more money banks are required to hold in their vaults and the less they can lend, which results in less money creation.
The aim, ultimately, is to limit inflation by preserving the dollar’s value. However, the Fed has kept interest rates artificially low for more than a decade - first in an effort to help the economy recover from the 2008 financial crash, and then to help it recover from the 2020 crash caused by the onset of the COVID-19 pandemic, which saw governments around the globe institute severe travel restrictions in a bid to control the virus spread. Especially in the latter case, Fed Chair Jerome Powell has faced criticisms that the policy has made the US economy weaker overall.

“I expect six quarter-point rate hikes from the Fed in 2022," Rob Morgan, senior vice president at Mosaic, told CNBC in the survey. He added that if the consumer price index (CPI), the US Bureau of Labor Statistics’ metric for tracking average price fluctuations, reached 9% in the bureau’s March or April reports, the Fed might take the drastic step of making a 50-basis point increase the following month.

Before the results were published, BLS released its March numbers, showing a 7.9% increase in CPI over the last 12 months. The Federal Reserve Board of Governors began its March meeting on Tuesday.
US stocks have slid for days on expectations of an interest rate hike, continuing a downward trend prompted by increasing crude oil prices caused by fears that the US would sanction or boycott Russian petroleum exports, as it has.

Rising gas prices will only deepen price increase trends created by the COVID-19 pandemic, which strangled international trade and made shipping goods more expensive. The BLS February report revealed the highest inflation rate in 40 years, which Fed board members said was primarily caused by the “supply chain” and not by large spending bills passed by Democrats, as Republicans have claimed.

"For a long time US investors broadly and US equity investors in particular have been heavily shielded from risk — by fiscal and monetary policy, the steady economic recovery from the great financial crisis and the bottomless global appetite for US assets," Goldman Sachs strategists argued in a recent note viewed by the Financial Times.
"The rising probability economists, analysts and pundits are placing on an American recession shows that risk is returning to markets. The process of accurately pricing risk, after this long holiday, is likely to be a long and choppy process."
When US President Joe Biden announced the Russian oil boycott earlier this month, he called the gas price increases “Putin’s price hike.”
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