The US Federal Reserve has been promising the general public a ‘soft landing’ to an otherwise turbulent economy for quite a while now, even though it was being heavily beaten by strong headwinds. The fallout of the pandemic, Russia’s neverending aggression against Ukraine, and the increasingly growing economic threat of China, however, only keep inflationary pressures and the threat of an impending recession rising. The Reserve’s acceptance of a hike in long-term interest rates early on in this quarter however is leading many to believe that the end is truly nigh.
The treasury yield functions as a benchmark for many domestic loans in the country. From the point of the public, therefore, the rising rates can be expected to have a widespread spillover effect in the country. The cost of mortgages, auto loans, and credit card debt will be some of the rates nearest and dearest to the American household affected. The impact will be multifold as the public will already be grappling with higher gas prices, this month’s resumption of student loan repayments, and the impact of union actions throughout the country, from the SAG-AFTRA strike to the ongoing autoworker’s strike. All these can be expected to lessen consumer spending, a leading cause of recession.
Proposed interest hike reaches the highest long-term rates since 2007
This hike sees ten-year treasury rates rise past 4.7%, an increase of more than half a percentage point. This increase will likely see the market undergo some contraction in commercial activities as borrowing costs rise for consumers and businesses alike. The increase also marks a break from usual economic trends as the yields on long-term treasury bonds linked to inflation are set to rise to levels unheard of in the last twenty years. This is due to the fact that the rise is also set to impact ‘real rates’ that include the cost of inflation. For its part, the Federal Reserve is pursuing this policy in order to bring down inflation to its promised rate of 2%.
However, the unchecked rise in long-term yield rates is also cause for concern for some experts. There is no dearth of employment opportunities to ignite a recession in the country so far: the Bureau of Labour Statistics’ Job Openings and Labour Turnover Survey reported an increase in job openings from 8.9 million to 9.6 million during the period from July to August. However, it is believed that the high yields on Treasuries pose the risk of having capital diverted from increasing business operations towards investments in these financial instruments. The higher yields occasioned by these interest rate increases, the rising dollar value, and rising oil prices are also all expected to bode ill for corporate earnings in the coming months. The combination may well signal an earning recession for the corporate sector, in which case there is a possibility that the nation’s economy might quickly follow suit. The incentive for equity divestments in favour of treasury yields will not help.
The US public is running out of savings
The early part of 2022 saw inflation, housing, and interest rates climb dangerously high, bleeding out the savings of the greater part of the US general public. Bloomberg Economics calculates that the bottom 80% of the US’ economic classes have significantly fewer savings in hand compared to the beginning of the pandemic. The trend has continued this year so far as well, with the middle classes also experiencing severe constraints on their savings. The personal savings rates for US households were estimated to be at a low 3.9% in August this year. If this depletion of savings rises to a point that the top 20% of the US’ wealthiest are affected, the pressure created on the economy by falling consumer spending could well trigger a widespread economic recession.
US economy expected to slow in the coming months
The US economy has been showing positive growth figures so far this year, especially in the July to September quarter. Goldman Sachs estimates that the quarter saw a growth of 3.5%. It also estimates that this growth will slow to a 0.7% annual rate for the rest of the year. The government’s budget deficit is also still showing signs of growth – the deficit is estimated to be $1.5 trillion so far this year- which the Treasury Department is seeking to fulfil with the auctioning of yet more debt. Whether these efforts will be successful remains to be seen as investors could perceive government debt as riskier to hold given current volatile conditions.
It does not do however to underestimate the US economy’s strength just yet as the economy is still showing growth trends, however modest. As mentioned, the job market is still showing positive figures, which should contribute towards shoring up consumer spending levels. It also means that unemployment rates continue at very low levels in the country, which will further stave off inflationary pressures. The overall reading of the market post-rates hike appears to be that the economy may yet be able to avoid a full-scale recession, despite some unavoidable contraction in the market. This would amount to what is generally described as a ‘growth recession’.
US not alone in slow growth and recessionary pressure
The UN Conference on Trade and Development’s warning that the world economy will continue to show slowing growth trends shows that the US is not alone in its recessionary fears. The UNCTAD’s reports also highlight the clear global disparity reflected in the levels of resilience displayed by various economies around the world. Countries such as the US, China, India, Japan, Russia, and Brazil have been fortunate in their post-pandemic recovery. Others, most notably in the global south, have not been so lucky. Most notably, the European region is also believed to be on a cliff edge of a recession amidst falling investment rates. In the US as well as abroad, economies worldwide clearly stand to benefit from strong monetary policies that stimulate demand to create the necessary motivation to stimulate growth. Increased focus on international cooperation in deciding on financial policies should also help reduce the stark disparity seen in global economies.
(Theruni Liyanage)