Growing Possibility of US Recession... Fed's Tightening Nears End

Warren Buffett, chairman of Berkshire Hathaway and known as the "Oracle of Investment," warned on the 12th (local time) about the Silicon Valley Bank (SVB) bankruptcy crisis, stating that "the bank failures are not over yet." Amid growing concerns about the banking crisis, minutes from last month's Federal Open Market Committee (FOMC) meeting revealed that Federal Reserve (Fed) officials have increasingly anticipated a recession in the second half of this year. With U.S. consumer inflation also slowing down, there is growing speculation that the Fed's aggressive tightening is nearing its end.

원본보기 아이콘

While visiting Japan, Buffett appeared on CNBC's Squawk Box and expressed caution about further banking crises. He acknowledged concerns related to commercial real estate (CRE) raised after the SVB collapse and said some banks might have to absorb losses.

However, he predicted that this crisis would not escalate into a broader threat. Buffett stated, "There is no need to turn the foolish decisions of managers into fear among all American citizens," adding, "There is no need to panic. No one will lose money deposited in American banks. That will not happen." He even said he would be willing to bet $1 million on this outcome.

In addition to Buffett, reports released the previous day by the International Monetary Fund (IMF) diagnosed that ongoing tightening and the SVB incident have increased global financial stability risks. Among these, further rate hikes could pose a more abrupt risk.

Fed officials also raised the possibility of a recession in the second half of this year due to the banking crisis. According to the minutes of last month's FOMC meeting released by the Fed that day, participants noted, "Considering the potential economic impact of the banking sector, a mild recession may appear from the end of this year," and "It is expected to recover over about two years." However, the meeting concluded with a consensus that easing inflation remained the top priority, resulting in a 0.25 percentage point rate hike.

Ed Hyman, chairman of investment advisory firm Evercore ISI, argued that the U.S. economy has already entered a recession and that the Fed should halt its rate hike cycle. Concerned about the financial shock triggered by SVB, he emphasized, "At least at the next meeting, they should not raise rates," and "The Fed should pause and see what happens."

Gita Gopinath, IMF's First Deputy Managing Director, acknowledged that recent U.S. economic indicators remain robust but warned that "the risk of a hard landing still exists." When asked about the possibility of the U.S. economy shifting to low or negative growth as the Fed continues raising rates, she responded, "That is possible."

[Image source=Yonhap News]

원본보기 아이콘

As concerns about the banking crisis and recession intensify, the market widely expects the Fed to implement a baby step (a 0.25 percentage point rate hike) at next month's FOMC meeting and then hold rates steady. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently assigns a 70% probability to a baby step next month. It also reflects the highest likelihood of a rate hold in June and a possible cut in July. Paul Ashworth, economist at Capital Economics, predicted, "The Fed will make its last 0.25 percentage point rate hike next month." Having declared war on inflation, the Fed has raised the U.S. benchmark interest rate to 4.75?5.0% since starting rate hikes in March last year.

Inflation is showing signs of slowing. On the same day, the U.S. Department of Labor announced that last month's Consumer Price Index (CPI) rose 5% year-over-year, the lowest level since May 2021 (5.0%). This slightly undershot the market consensus of 5.1% compiled by Dow Jones. The previous month had seen a 6% increase.

This is the first time the monthly CPI has been in the 5% range since September 2021 (5.4%). Although core CPI, which excludes volatile energy and food prices, rose compared to the previous month, the trend supports the analysis that U.S. inflation is easing. Jeffrey Roach, chief economist at LPL Financial, said, "Investors have gained more confidence that the next FOMC meeting will be the last rate hike." Diane Swonk, chief economist at KPMG, noted, "Prices are not low," but added, "It's better news than a year ago." Core CPI rose 5.6% year-over-year and 0.4% month-over-month. The Producer Price Index (PPI), a wholesale price gauge, will be released on the 13th.

The released minutes also included numerous references to the need for flexibility in future monetary policy. The minutes stated, "Due to developments in the banking sector, credit conditions for households and businesses have deteriorated, which could weigh on economic activity and employment," and emphasized, "There is a need to adopt a flexible and selective approach to monetary policy."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.