Recession in America? Here We Go! So, What’s Next Now?
The Fed continues to apply its strategy, which is bearing fruit, as the drop in 10-year rates demonstrates.
As I announced at the beginning of July, there were three major dates expected by all investors for this month: July 13, July 27, and July 28.
These dates corresponded respectively to the release of the inflation figures in America for June 2022, the decision of the Fed regarding a possible new rate hike, and finally the release of the US GDP estimate for the second quarter of 2022.
The numbers released only confirmed what we knew: inflation has not peaked, the Fed is still pushing hard on the brake pedal, and America is in recession.
For the latter, nothing was certain, but many already had this feeling by looking at the Atlanta Fed's GDP Now index.
For as long as everyone has been talking about that R-word, here it is becoming a reality. In the first quarter of 2022, the U.S. economy declined by 1.6%. In the second quarter, the decline was 0.9%. Joe Biden is already trying to change the definition of a recession by saying that this is not the case in America right now.
Janet Yellen joins the lie because we have to prepare for the Midterms at the end of the year … However, America is in a recession. Technically at least.
Moreover, the recession will soon affect Europe, starting with Germany. You know the main reason: inflation, which weighs on household consumption but also companies’ investment.
Having said that, the big question you should be asking yourself now is: is it serious that America is in a recession?
In my opinion, it is not for at least 3 reasons:
It's a decline in growth in America from a high post-Covid GDP level. There was a catch-up effect.
Even if technically it is a recession, it is more of a “slowdown” of growth, in reality, hence Janet Yellen's statement on the subject for example.
The underlying U.S. economy is still very strong as evidenced by employment levels that remain historically high.
More importantly, we need to understand why the Fed has accelerated this technical recession in America. This recession is necessary for the eyes of the Fed because it will take pressure off the economy and thus lower inflation.
Because of the rapid increase in key rates, with another 75 basis points increase announced on July 27 by Jerome Powell, the slowdown in growth in America will probably get worse. This makes four times in a row that the Fed has announced a rate hike, with a 75 basis point increase the last two times.
The Fed's goal is to slow down growth in America.
Now you can see why I told you earlier that rates had to go up before they could go down again. For those of you who are late to the party, let me explain the Fed's simple reasoning again. A sharp rate hike will slow the economy, before bending inflation. Long-term rates, which are based on expectations of slowing and falling inflation in America, will be allowed to fall.
In two months, the Fed has raised key (short-term) rates from 1.5% to 2.25%-2.5%. And the benchmark 10-year U.S. government bond rate fell from a high of 3.5% to 2.65% by end of July:
The drop is as spectacular as the increase observed from the beginning of the year until the high of 3.5%. So rates had to go up before they could go down.
In the coming months, you should expect the Fed to continue this. The rate hikes will continue. The pace will be less frantic once the first signs of falling inflation are seen. Then, in 2023, the Fed will be able to ease off the brake pedal again by gradually lowering rates.
Moreover, the rally observed in the financial markets over the last few days confirms that optimism is back and that the attitude of central banks is reassuring investors. As the ECB has shown, everything will be done to save this debt-driven system. The latest anti-fragmentation tool announced by the ECB is simply the announcement of the return of unlimited QE if needed.
No wonder the markets like it. This is spilling over into the Bitcoin market and the cryptocurrency market driven by Ethereum and the recent merge on its Blockchain. We will see if this continues throughout August.