November 01, 2022
Inflation is proving to be a thorn in the side of central banks. That’s why nearly every central bank is raising interest rates, hoping to put it back in the ground.
Raising rates generally means lower asset prices and less growth, which consequentially means weaker economic output and weaker earnings.
That’s a large reason why stocks are down this year, but given the global environment, raising rates is perhaps the least of worldly troubles: the war in Ukraine, energy crises in Europe, political instability and turnover, and the continued threat of inflation all weigh heavy as economic leaders pull the levers.
That’s why America’s Q3 2022 GDP readout last week was probably shocking to most Americans — whereas other economies are in decline, America exited its short-lived two quarter economic recession.
Zoom Out, We’ve Been Here Before: A Short History of Market Corrections.
But that comes with an asterisk: analysts warn it will be back.
- Inflation rose during the pandemic. Academics have debated and disputed the source of this ‘original sin’, but many economists argue COVID-era stimulus and fiscal policy — that’s the laws and bills passed by Congress and politicians — put us in the hole.
- The Fed responded to inflation by beginning to raise interest rates. Their first hike in March 2022 roused concerns about a slowdown and economic recession. And indeed, the U.S. had a technical recession in Q1 2022 and Q2 2022.
- However, the economic recession is arguably not the Fed’s fault — America was pumped up on trillions of Dollars of stimulus and a regrounding might have been necessary.
- As we go into Q3 and Q4 though, often a boomtime for American businesses as we march towards the holiday season, GDP is looking up again.
- Analysts argue the ‘Escape from Recession’ won’t last, though: Bloomberg says there is nearly a 100% chance we will experience an economic recession next year.
- Many economists are ready to blame the interest rate hikes — past, present, and future. Investment banks expect U.S. rates to peak around 5% by the middle of next year, which will bring the rates on mortgages and personal loans to over 10%.
- Those high rates mean a slowdown is in the cards. In zero-interest rate policy (ZIRP) conditions, growth can generally happen quickly. But with ZIRP and fiscal policy, the inflation problem threatened to run out of control.
Now the U.S. needs to strike a delicate balance between its interest rates, inflation, and GDP — and one might raise at the cost of another in this environment.