[Comprehensive] Uncontrollable Inflation, Deepening Fear of R... Powell's Growing Concerns

[Asia Economy New York=Special Correspondent Joselgina] The inflation shock is spreading into the so-called 'R (Recession) fear'.

Unlike the Federal Reserve (Fed), which stated that a 'soft landing' to control inflation with slight pain is possible, 7 out of 10 economists warned that the U.S. economy will enter a recession phase next year. Many Wall Street investment banks also pessimistically predicted that a recession is unavoidable. Jerome Powell, the Fed Chair responsible for stabilizing prices, is increasingly evaluated as facing a 'grim calculation' between high inflation and recession risks.

◆ 68% of Economists Predict "U.S. Recession Next Year"... Powell Trapped in a Choice Dilemma

According to a survey jointly conducted by the University of Chicago Booth School of Business IGM on the 12th (local time), 68% of economists surveyed expected a U.S. recession in 2023. Specifically, 38% predicted the first half of 2023, and 30% the second half. For the first half of 2024, 9% predicted a recession, and 21% for the second half.

This survey result was released amid rising concerns about Fed tightening after the U.S. Consumer Price Index (CPI) for May rose 8.6%, the highest in 41 years. Contrary to the Fed's outlook, the majority of economists see a recession as inevitable.

In particular, 40% of them believed that even if the Fed raises the current benchmark interest rate of 1% to 2.8%, controlling inflation would be difficult. Mohamed El-Erian, economic advisor at Allianz, warned, "U.S. inflation could worsen and reach 9%," adding, "If high inflation persists, a recession will inevitably occur."

As inflation soars, the path for the U.S. to avoid a recession is becoming narrower. The Fed appears to be increasingly approaching a 'Hobson's choice' with virtually no alternatives.

Inflation data released ahead of the June Federal Open Market Committee (FOMC) meeting on the 14th-15th further fueled recession concerns. On Wall Street, the previously expected 'inflation peak theory' was dashed by the May CPI release, raising voices that the Fed's future response will inevitably take an aggressive stance.

Bloomberg reported, "Soaring inflation is pressuring the Fed to take more action," and "Jerome Powell faces a grim calculation of having to push the economy into recession to control inflation." Moody's Analytics forecasted in a report at the end of last month, "If the Fed does not act aggressively enough, stagflation could occur next year," adding, "The Fed may face a Hobson's choice." Hobson's choice refers to a situation with no real alternatives.

At this month's FOMC, there is a high possibility of a so-called 'big step' rate hike of 0.5 percentage points. The size of the increase is the same as previously announced. However, the key issue is hints about tightening after July. The market is watching whether Chair Powell will suggest a big step in July during the press conference or leave open the possibility of a 'giant step' of a 0.75 percentage point rate hike. Interest rate hike paths and changes in long-term interest rates on the accompanying dot plot are also points of interest.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) rate futures market reflects a 30% chance of a 0.75 percentage point rate hike in June and a 70.0% chance of a 0.25 percentage point hike.

◇ Intensifying Recession Debate

Ultimately, if the Fed chooses bold tightening to control inflation, many predict that a recession and rising unemployment, similar to the 1980s, will be inevitable. Unlike the Fed, which has emphasized a 'soft landing,' Wall Street investment banks such as Goldman Sachs and Deutsche Bank have already expressed concerns that a recession cannot be avoided.

Larry Summers, Harvard University professor and former Treasury Secretary under the Bill Clinton administration, appeared on CNN that day and warned that the U.S. will face a recession within the next 1-2 years. Summers has been calling for more aggressive monetary tightening to curb soaring inflation. He also pointed out that the Fed is "overly optimistic" about inflation. Bruce Kasman of JP Morgan Chase also diagnosed, "If the Fed focuses on stabilizing inflation, it will eventually be difficult to avoid a recession."

There is also analysis that signs of economic downturn are already being confirmed one by one in the U.S. economy. CNN reported that the U.S. economy is showing signs of slowing, citing Fed rate hikes, simultaneous sharp declines in stock and bond markets, inversion of short- and long-term Treasury yields, the Ukraine crisis, and other global risks. The worsening consumer sentiment, which accounts for a significant portion of the U.S. economy, is also cited as a concern. The preliminary University of Michigan Consumer Sentiment Index for June, released earlier, recorded 50.2, the lowest since the survey began in 1978.

On the other hand, former Fed Chair Ben Bernanke viewed that the Fed has room to avoid a recession in the fight against inflation. He mentioned strong employment indicators and stated that if supply-side pressures improve, a soft landing as the Fed says is possible.

This content was produced with the assistance of AI translation services.