The Federal Reserve’s tightening cycle might lead to a long-term recession by 2025.
It didn’t end well for the Wall Street indexes this past week. All major industries declined for four days straight. Gold is rising as the market’s risk rises, and crude oil remains at an average of $105 per barrel.
The growing risk of the market is pushing haven asset prices through the roof. As investors worry about the long term effects of the FED’s tightening policy,
Now, the probability of eight interest hikes this year is high, and May interest hikes are on the door.
On Monday morning, the S&P fell by 0.5%, the Nasdaq index declined by 0.6%, and the Dow Jones retreated by 0.25%. Crude oil prices declined this morning compared to yesterday’s prices but were slightly higher than last week’s Monday prices.
This morning, gold was only $4 away from reaching $2000 per ounce. This morning, it rose by 1.08% to $1996 per ounce. As the market risks grew, investors turned their money to gold and that resulted in increases for five straight weeks. Gold is hitting new highs for the past five weeks at a faster rate than anyone has seen since 1960.
Spot gold rose 1.08% by Monday evening after recent reports of a possible military operation in Kyiv. The 10-year Treasury yield in the United States has risen to near 3%, its highest level since early 2019. Russian military operations have pushed the commodity market to new high levels and now investors are thinking of a long-term recession possibility.
Yesterday, Goldman sashes official experts’ predictions, predicting a 35% possibility of a recession within the next 2 years. Experts believe eight interest hikes this year might cool down prices but at the cost of causing a recession in the long term.
The U.S. Federal Reserve aims to focus on two main problems now: fighting inflation and boosting the labor market. According to the latest report by the Labor Department Bureau, the U.S. labor force is still weak with a 5 million worker shortage.
The producer index for MarchPPI rose by 11.2% compared to the same period last year, which is a strong indicator of a high inflation hot spot. The U.S. economy has been under massive pressure for the past 6 years. When the economy appeared to be recovering from the effects of the pandemic, the war pushed up energy prices and both commodities to new highs.
Goldman Sash believes that if the Federal Reserve increases its rates aggressively, that will cause a long-term economic recession by 2025. Since WWII, the United States has raised interest rates 14 times. According to the data, 11 of the tightening cycles were followed by some sort of recession or economic slowdown, which began with labor forces.
This year’s tightening cycle is no exception, according to Sash.
The PPI index is not the only indicator of a two-year recession possibility; consumer confidence fell compared to last year. On top of that, the consumer spending index fell because of soaring prices and a below-normal labor market.
Well, till now, nothing will confirm this production, but if history shows one thing, it is that aggressive interest rates always result in some kind of economic downturn.
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