Last quarter (Q1 2022), GDP growth expectations were projected to be 1.8% but actually came in at a staggering -1.4%. In the current quarter (Q2 2022), GDP expectations are still set at a positive 2.3%; even in a rising interest rate environment, a capitulating stock market, weakening consumer confidence/sentiment, weakening labor market, and lingering supply chain issues.
The Fed now, is probably clinging onto the hope that this quarter’s GDP expectations can be met due to the weak print from the preceding quarter; but what happens if GDP growth declines in two consecutive quarters? Well, that used to be what the National Bureau of Economic Research (NBER) classified as a recession. Nowadays, a recession “officially” occurs pretty much whenever NBER says it does.
Be that as it may, NBER still gets very scientific before declaring a recession. Some characteristics they need to see before pressing the panic button are a decline in real income, employment, retail sales, and industrial production. An economy facing these conditions is then usually forced to endure a periodical contraction in aggregate spending along with a decay in investor/lending sentiment. So with fewer people spending, lending, and investing, this should drive us into a deflationary period, right?
Normally, yes; one of the main causes of deflation is slow (or negative) economic growth. But these are abnormal times. Even in the midst of what is seemingly a recession, the most recent inflation print still came in at a scorching 8.3%; which brings us to the word economists use to describe a recession-inflation environment: stagflation.
This puts the Fed in a bind. On one hand, if the Fed proceeds with their monetary tightening, it tightens the clamp on spending, employment, investing, and further aggravates the global supply chain. On the other hand, they could pursue expansionary policy, which will drive up the existing surplus in money supply and thus, cause more inflation. On the plus (or minus) side, it will still take around 12-18 months for monetary policy effects to be felt in the actual economy. However, this only invites me to wonder where the Fed was 12-18 months ago.
For the last nine months or so, Wall Street and beyond has continuously cried that the Fed has lost credibility; which ironically claims the Fed actually had any credibility to begin with.
So cheers or whatever,
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