Source: Bloomberg

Author: Anna Wong, Enda Curran, Ouile Eagle

Fed Chairman Jerom Powell believes that the US economy can escape the recession.But the lucky goddess may not stand on his side, because the banking industry, political factors, and even the weather are not good for the economy.

In Powell's view, even if the interest rate has been raised by 5 percentage points in more than a year, the strong labor market in the United States can flatten the road for soft landing.Indeed, the non -agricultural employment data released last Friday is indeed quite strong.

Credit tightening is imminent.Under the comprehensive influence of the Fed's tightening policy and bank failure, the impact of small enterprises and commercial real estate may be particularly serious.

The upper limit of the debt of Washington.The confrontation between the United States on debt issues may lead to severe financial pressure for a period of time.If the U.S. government does break the contract, the impact on the economy and market may be no less than the 2008 financial crisis.

El Nino climate.There may be extreme climate conditions around the world, or disrupt the supply of commodities, push up prices, and keep the Fed's continuous attention to inflation.

Excessive tight labor market means that the Fed will have to maintain interest rates at a high level for a long time, which is why the risk of economic recession is so high.To achieve Powell's prediction, the US economy must overcome three major obstacles because they all point for the economic downturn in the second half of the year.

If these three combo do cause the economy to fall into a decline, Powell and his colleagues can do not do much.Rest -cutting is the main tool to fight for economic recession, but it is quite tricky for the Federal Reserve, because the inflation rate has not returned to the target level.

The United States will pay the price for the most aggressive currency in the past forty years.Since March last year, the Fed's policy interest rate has risen from nearly 1st to 5%.In recent history, this policy will almost lead to economic recession.

James Galbraith, a professor of economics at the University of Texas, said, "In the past 50 years, the Fed is mainly responsible for macroeconomic policies, I can't find a good example of" soft landing ', and I don't understand whyThe current situation will be different. "

"Main cuisine"

From interest rate hikes to economic atrophy, this logical chain is very direct.As the cost of lending rises and the asset prices have fallen, the expenditure slows down, and the corporate layoffs.For the central bank, the rise in unemployment rate and the decline in salary levels caused will promote inflation to the target level.

In other words, the economic recession is not an accidental side effect in the process of anti -inflation. The decline is the "main course".This also explains why Bloomberg economist has predicted that the economist will decline in the second half of 2023.

In a sense, a wave of bank failure caused by Silicon Valley banks is actually expected.No one knows exactly what the Fed's continuous interest rate hike will break, but everyone feels that something will happen.

If there is a choice, I believe that the Federal Reserve does not want regional banks to be trapped in troubles to become a breakthrough point for inflation decline.

The wave of bank closures enlarged the impact of interest rate hikes on credit.In fact, last year, the credit barometer of the Federal Reserve -Senior Loan Survey -has shown that the credit standard has begun to tighten, but this trend has further accelerated after the closure of Silicon Valley Bank.Under normal circumstances, the slowdown in credit is a lagging indicator of the cautious mentality of banks, which is one of the reasons why the economy will decline in the second half of the year.

More importantly, the pressure of the banking system is like snowball.At the beginning, the market believed that Silicon Valley Bank was a special case, but as the crisis spread, it seemed to become a common phenomenon in the industry.As for the scale of assets, banks that have closed in 2023 can be compared with 2008.

Powell stated at a press conference that the first trust bank was taken over by Morgan Chase, which was an important step towards the crisis.But since then, the stock price fluctuations of other regional banks have shown that this line has not yet been connected, and it still exists in the form of scattered points.

Debt default?

At the same time, the upper limit of the debt of Washington is upgrading in a more dangerous direction than in the past.

The Minister of Finance, Yellen on May 1, warned that the special accounting strategy adopted by the Ministry of Finance to avoid the breakthrough of the debt was made in early June.Since the legal limit of $ 31.4 trillion in January, the Ministry of Finance has been doing everything possible to avoid triggering default.

U.S. President Biden and the House of Representatives McCarthy will be held on May 9 to hold a debt limit negotiation, but it is expected to not make breakthroughs.McCarthy has been promoting the debt limit proposal of the Republican version. The exchange conditions are significantly cut expenditure, but the Democrats have rejected.

Under the best case, the market pressure intensified the market pressure for a period of time to reach an agreement.In the worst case, debt defaults will cause the global financial system to fall into the abyss, and the US economy will be severely declined.

If economic growth does start to slow, then viscous inflation will limit the Federal Reserve's movement space.

Powell told reporters last week that given that the price increases faster than the Fed's expectations, "interest rate cuts are not suitable, we will not cut interest rates."The translation is: If the economic recession comes, don't expect us to provide currency stimuli.

March's inflation rate is 5%, and it seems that the peak value of more than 9%last summer has dropped significantly, but this is not difficult. The relief of supply chain problems and the decline in energy costs helped the Fed.The hardest part is still behind.

Bloomberg Economic Research predicts that the end of rising salary, the end of the trend of commodity and energy prices will cause core inflation to stick to about 4%by the end of this year.The actual situation may be even worse.

El Nino

The National Oceanic and Atmospheric Administration predicts that the probability of extreme weather during May to July will be 62%, and it will rise to 80%by autumn.As some model predictions, the strong El Nino phenomenon may exacerbate inflation.

Hurricanes and floods may attack Galifa and southern United States, affecting food and energy output.Globally, droughts in parts of Asia and heavy rain in South America and Africa will affect harvest.

The International Monetary Fund (IMF) predicts that the serious El Niopy phenomenon may increase the increase in commodity prices by 4 percentage points, and then completely squeeze the few room for interest rate cuts in the United States.

Of course, soft landing is also possible, after all, there are some signs of favorable.In July 2022, the Federal Reserve director Christopher Waller said the change in the labor market -the decline in the shortage of jobs and the unemployment rate remained stable -it may bring relatively stable and painless inflation decreases.Since then, the number of vacancies in jobs has indeed declined, and the unemployment rate is still low.

Olivier Blanchard, an economist at Peter Sen Institute, stood on the opposite side.He said that he still believes that the unemployment rate is possible, but "If the vacancy of positions in the next few months continues to decrease and the unemployment rate has not increased, then Waller may be right."

"Trouble"

There may also be other results.One is the "rotation decline", that is, an industry has been impacted by an industry, but the economy has never shrunk as a whole.Evidence shows that before the labor market has fallen significantly, the manufacturing and real estate market bottomed out.

"My most optimistic expectations are weak economic growth in the next few months," said Karen Dynan, a professor at Harvard University."We can only be hardIt's hard to travel, this may not feel good, but it means to avoid economic recession. "

However, whether it is soft landing or rotation decline, it is difficult to be regarded as the baseline situation.

The latest data of the decline probability model of Bloomberg's economic research shows that the economy has declined almost on July.However, it is still not possible. If we have learned some lessons in the past few years, it is okay to be sure.All in all, the probability of recession occurred higher than the probability of no occurrence.

This is a bad news for Powell's optimism.To make matters worse, the superficial economic recession is not even enough to return inflation back to the target level.On average, in the past, the economic downturn will only reduce the core inflation rate and decrease, and there are significant lag.

In summary, stagflation is the most likely result when economic atrophy and inflation are still too high.