Hitting markets with a 75 basis-point rate hike last week, 69-year-old Federal Reserve Board Chairman Jerome Powell signaled his plans to get a handle on the 8.6% inflation rate, the biggest in 40 years. Some economists hoped for a “soft landing” but now looks like any more rate hikes to slow inflation will push the Gross Domestic Product [GDP] into more negative growth, something that started in Q2 when GDP shrank 1.4%. Powell admitted publicly that the Fed only has certain tools to deal with macroeconomic events, like the war in Ukraine, creating ongoing challenges for the economy. Hiking rates or ending stimulus AKA “quantitative easing,” where the Feb buys back Treasury bonds, can only do so much when government spending, especially on defense, outpaces tax receipts. Powell can’t guarantee that tightening credit, raising rates and ending stimulus can offset a recession.
Powell’s public comments on “geopolitical” events mean to signal 75-year-old Janet Yellen the White House needs to look at bigger problems from the Ukraine War that are now contributing to the 40-year high in inflation. If supply chains remain tight and if the Treasury keeps spending billions, all bets are off in terms of what Powell can do to fight inflation.. Investment bank Nomura said the U.S. economy would continue to contract in the Q4 maybe even Q3, just like it did in Q2. Nomura expects GDP to contract by year’s end and into 2023, whatever the Fed does but certainly if it continues to hike the Federal Funds Rate. Nomura predicted that 2022 GDP would grow by 1.8% but only because of Q1 where the economy was still coming out of pandemic. Nomura expects today’s 3.6% unemployment rate to climb to 5% in 2023 and 6% in 2024, also adding to the recession.
Nomura economists Aichi Ameniya and Robert Dent said persistent inflation would prompt the Fed to continue hiking rates for the rest of 2022, slowing the economy by year’s end. “With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe that a mild recession starting if Q4 2022 is no more likely that not,” said Ameniya and Dent. Both economists don’t take into account the ongoing Ukraine War that continues to impact the energy sector, keeping fossil fuel prices high into the indefinite future. If President Joe Biden, 79, doesn’t pivot away from the Ukraine War, Nomusra’s forecast of a mild recession doesn’t hold up. Biden said last week that all Americans must sacrifice for freedom, even if it means a prolonged period of high gas prices and everything else. Unless the war ends, the world can expect an extending period of high inflation.
Powell admitted the “geopolitical” events throw a monkey wrench into the Fed’s ability to lower inflation or open up frozen supply chains. Biden can’t have it both ways, expect to improve the economy while the war fuels the worst inflation in 40 years. Biden has shown no signs of ending Russian sanctions, prohibiting the sale and distribution of Russian oil. As long as Russian oil is removed from world markets, it’s unrealistic to think that the Fed can get control of inflation. High energy prices increases transportation costs, causing inflation in just about everything. Airline tickets have doubled in the last year, making travel plans all the more difficult for average citizens. When pandemic-saving consumers run out of cash, there will be a drop in consumer activity needed to support GDP growth. It’s only a matter of time before the economy slows for good, forcing the Fed to start cutting rates or live with an ongoing shrinkage in GDP growth.
Elected officials on both sides of the aisle need to get out of the current war fever and reconsider what the Ukraine War does to the U.S. and world economy. Spending untold billions on funding the Ukraine government and the war, makes economic recovery all but impossible. Fed Chairman Powell can only do so much to fix a broken economy, largely because of a Russian oil embargo. Accounting for some 25% of world oil production, Russia can’t be kept out of the loop without fueling massive inflation in the energy sector and beyond. How does Biden get a handle of inflation when the cost of energy continues to go through the roof? At some point, Biden will have to tell Zelensky that the U.S. can’t support the Ukraine government a war effort indefinitely. Letting the Fed continue to hike rates can only end badly, with the U.S. economy going into negative economic growth.
Biden has some big decisions to make about continuing or ending his proxy war against the Russian Federation. Whether Kiev or Washington want to admit it or not, the war has gone badly for Ukraine, with Zelensky losing the entire Black Sea coast. Biden and Zelensky can’t continue to pretend they’re winning the war when the overwhelming evidence shows otherwise. There’s no denying that Russian President Vladimir Putin has seized the entire strategic Black Sea coastline, making peace talks next to impossible. Regardless of all the economic fallout, Biden seems committed to his proxy war against the Russian Federation. As long as the war goes on, it’s going to be difficult to get any economic traction, with spiraling oil and gas prices driving the worst inflation in 40 years. Powell admitted he can’t control Biden’s geopolitical events that have harmed U.S. GDP.
