Recessions. Are we going to see one?

^{Written by: Trek Investment Committee}

Recessions. Are we going to see one?

Inflation and interest rates have been the long running story for quite a while now, showing historically high inflation cast a pall over the economy since early 2021. In response, the Fed raised rates rapidly to combat inflation, raising concern that the hikes could trigger a “hard recession.” Fortunately, inflation has been on a downward trend since last summer suggesting that their interest rate program has been effective in taming inflation. ^1,2

So, will the Fed keep raising interest rates?

Last week the Federal Reserve raised interest rates an additional quarter of a percent after a brief pause in the rate hikes. In the statement issued by the Federal Open Market Committee (FOMC), the committee reiterated their commitment to combatting inflation and bringing down long-term interest rates to 2%. However, there is some concern that rates may not continue to drop as fast as they have in the past year.³

Does that mean that a recession is off the table?

Unfortunately, to say that we have bypassed a recession is far too optimistic at this point. Markets have been rebounding and things have simply not been as economically challenging as many had feared, with second quarter GDP numbers reported to be stronger than expected, but there might be signs, and employment trends will be one to watch.

So far, the work of lowering inflation seems to have succeeded without damaging the job market, and unemployment has remained very low.  However, this doesn’t necessarily mean we are in the clear. It’s important to remember that Fed soft landings are still very rare. The longer the Fed has to continue to hike rates to bring rates down, the more likely they are to over-tighten, potentially leading to higher unemployment. In fact, according to the Fed Economic forecast, there is an expectation for unemployment to rise to 4.1% by the end of 2023 and to 4.5% by the end of 2024.^4,5,6

If economic growth continues to remain stronger than expected, the Fed may be forced to raise rates, and we could see some renewed volatility in the markets. So, while the dark clouds on the horizon appear to be breaking up, and there are reasons to be optimistic, it doesn’t necessarily mean smooth sailing.