The Case for Pausing Fed Interest Rate Hikes

•  Nama.Cohen

•  Feb 01 2023
 

The latest published economic data reinforces the fear of falling into a recession. For now, it is difficult to assess whether the weakness emerging from these data will continue and perhaps even worsen in the coming months. However, the US economy has already proven in the past its flexibility, strength and ability to absorb economic shocks as well as deal with interest rate increases.

One of the main questions at the beginning of 2023 is whether and to what extent the economy will fall into recession.

The definition of a recession is a decline in GDP for two consecutive quarters. In the United States there is an official committee that is supposed to announce this. However, this is a complex definition, as the GDP may decrease by small amounts in these two quarters, but recover strongly in the following quarters. Therefore, it is important not only for the duration of the contraction of the product, but also for its strength.

Two assumptions have been floating around in the stock markets recently: one, the economy will indeed weaken, but in the form of a "soft landing", which will allow the Federal Bank to curb inflation and bring it down towards the target level without causing real damage to business and employment activity. Such a scenario, supported in the meantime by a strong labor market, lack of job filling and the outflows from the Corona period, will be welcomed by the market and may stabilize the stock markets, after the significant declines they recorded last year.

The second assumption is that economic activity will weaken considerably, to the point of a real recession, which will force the Fed to stop raising interest rates sooner and possibly even lower them, without guaranteeing and being convinced that inflation is indeed falling consistently towards the target level. This is a more complex scenario. On the one hand, the business sector will benefit from the fact that the interest rate will be lower, since the cost of financing its activities will decrease. On the other hand, a real economic slowdown will reduce the scope of activity, revenues and profit.

At the end of the day, the big question is whether the forecasts and the leading indicators show the correct picture and we are indeed on the way to a considerable weakening, or perhaps the current conditions index shows that the concerns are too exaggerated.

Published economic data began to reinforce the weaker assumption. The retail sales index, which reflects consumer activity, fell by 1.1% in December, 3 times what was expected, the productivity index fell by 1.3% in December and ended the entire year 2022 with a 0.5% decline, and the producer price index fell by 0.5%, compared to expectations that it will rise. These are data that should make the Fed think twice before raising the next interest rate, scheduled for early February.

Conclusion

For now, it is difficult to assess whether the weakness emerging from these data will continue and perhaps even worsen in the coming months. The US economy has proven in the past its flexibility, strength and ability to absorb economic shocks as well as deal with interest rate increases and it is very possible that its economic performance will surprise for the better and the stock markets will start to rise.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

Read Next

Leading Gainers

Upgrades

Downgrades

Top Leaders

Ipo's

Dividend

Option Activity

Insiders Activity

Institutional Holdings

New Products

FDA Approvals

Agreements

Financial Reports

Log In

Sign Up

Contact Us

Terms of use

Privacy Policy