This weekend’s reading material:
The Federal Reserve System’s Annual Report from the Board of Governors.
????https://t.co/XOzyDiCNqC#economy #markets #centralbanks #federalreserve #fed #econtwitter— Mohamed A. El-Erian (@elerianm) August 16, 2024
The Federal Reserve’s ongoing hikes in interest rates may lead the U.S. economy into recession instead of tempering inflation, according to Radhika Desai, a political studies professor at the University of Manitoba. With 11 rate increases implemented by the Fed from March 2022 to July 2023, the target federal funds rate now stands at between 5.25 percent and 5.5 percent, a level it has maintained at a two-decade high. Desai, who is also a visiting professor at the London School of Economics, mentioned in an interview that raising interest rates is not a viable remedy for inflation since it reduces demand.
“The Federal Reserve is equipped with only one tool: monetary policy through interest rates. When you have a hammer, every issue appears as a nail.
Current market predictions for Fed rate adjustments…
-Sep 18, 2024: 25 bps reduction to 5.00-5.25%
-Nov 7, 2024: 25 bps reduction to 4.75-5.00%
-Dec 18, 2024: 50 bps reduction to 4.25-4.50%
-Jan 25, 2025: 25 bps reduction to 4.00-4.25%
-Mar 19, 2025: 25 bps reduction to 3.75-4.00%https://t.co/l5IYmkeySJ pic.twitter.com/EnbM8dbb6v— Charlie Bilello (@charliebilello) August 16, 2024
They are applying the only method they possess against inflation, yet the true solution is not to elevate interest rates, which merely fosters a recession deep enough to suppress demand,” Desai articulated.
Desai pointed out that rate increases jeopardize the financial system and asset markets by hindering trading activities.
?? #FederalReserve Encounters New Challenges as It Balances Inflation and Employment Risks – Bloomberghttps://t.co/8vrzX7v8Fw pic.twitter.com/PTyRAA1nVM
— Christophe Barraud?? (@C_Barraud) August 18, 2024
Impact of the Fed’s Interest Rate Decisions
“The primary factor for the Federal Reserve when considering interest rate adjustments is their influence on the financial sector.
Many are advocating for a reduction in interest rates due to the risk they pose to asset markets. These markets depend on leveraged trading, enabling individuals to borrow money at low costs to invest and earn profits, which is jeopardized when interest rates increase,” she noted. Desai also emphasized that the U.S. economy is teetering on the brink of a recession comparable to the 2008 financial collapse, with interest rates now at 5.25 percent.
“The last instance when the Federal Reserve raised rates to this extent was in the mid-2000s, which resulted in the collapse of the housing and credit markets in 2008. We have already reached this threshold and are witnessing signs of a crisis. While the financial sector has become more regulated and resilient, the improvements are marginal.
I predict that a recession is forthcoming and may happen before the next U.S. elections,” Desai concluded.
