Upcoming Recession?

 Upcoming Recession?

Written by: Brad Olinger 

As inflation rates have risen to  8.54% this month the Federal Reserve has been put into a position where they need to take action in order to lower prices. They have already increased the federal funds rate by 25 points in their latest meeting and will most likely increase the rate by a large margin again in their next meeting. The Federal Reserve's goal in doing so is to lower inflation by four percentage points without causing a recession. A “soft landing” is what they are referring to as their plan for lowering inflation and lowering the unemployment rate, while trying to stay out of a recession. A successful “soft landing” would get inflation lower than four percent while lowering the 11.3 million job vacancies from last month. Obviously to stay out of a recession as well. Even the Federal Reserve admits that it will take some luck and outside factors to go their way for them to be successful, such as sidelined workers from the pandemic to return and energy prices to lessen worldwide. 

Based on the information the Federal Reserve has released and their prior history with soft landings, a recession is most likely on the horizon. Most experts and people in banking and financial industries believe there will be an upcoming recession as well. In a recent article by Fortune, they state that Wall Street believes there to be a recession in 2023 due to inflation, the yield curve inversion, and that history will repeat itself of similar situations in the past. “It acts as a tax. So give it a little bit of time in the economy, and it will eat away at your wealth and set the stage for a recession,”says Gary Pzego, an economist for CIBC on inflation. 

Along with that a huge red flag for a recession that economists are looking at is the yield inversion curve. It shows the yields on long term 10 year bonds minus short term 2 year government bonds. It has predicted every single recession correctly since 1955 except for one occasion. Almost every time there is a recession between 6 and 24 months before it the yield inversion curve of 10 year bonds minus 2 year bonds decreases. This year the yield curve has decreased at an even greater rate than before the great recession in 2008 as shown in the graph below. 

This graph shows the comparison of the 10 year minus 2 year treasury yield curve and the Wilshire 5000 Total Market Full Cap Index with circles on recessionary periods.

So when and what we should expect this recession to look like. Well there have been different guesses from experts on when this recession might come. Deutsche Bank just announced that they expect it to come between late 2023 and early 2024. In early April, they announced that they are predicting a mild recession, but over the past few weeks they have become more concerned and just this week have announced their prediction of a major recession in the next two years. While being the first major bank to announce their prediction on a recession they are not the only one talking about it. Goldman Sachs isn’t as worried at the moment, only giving a 35% chance of a recession in the next year, but that is up from a comment saying that they see no chance of a recession forthcoming just a few weeks ago. Either way the Federal Reserve has their work cut out for them with their attempted “soft landing” and keeping an eye on what they are doing. Along with what banks are saying and doing would be a good idea in order to be prepared for whatever happens. 

Works Cited

Daniel, Will. “Here's Why Wall Street Is Predicting a 2023 Recession.” Fortune, Fortune, 9 Apr. 2022, https://fortune.com/2022/04/09/why-wall-street-predicting-recession-2023-federal-reserve-inflation-unemployment-yield-curve-carl-icahn/.

“Federal Reserve to Begin Risky Pursuit of a 'Soft Landing'.” Yahoo! News, Yahoo!, https://news.yahoo.com/federal-begin-risky-pursuit-soft-150527349.html.

Hui, Posted by Cam. “A Recession in 2023?” Humble Student of the Markets, 18 Dec. 2021, https://humblestudentofthemarkets.com/2021/12/18/a-recession-in-2023/.

Quiroz-Gutierrez, Marco. “Deutsche Bank Just Predicted 'A Major Recession'.” Fortune, Fortune, 28 Apr. 2022, https://fortune.com/2022/04/27/deutsche-bank-major-recession-2023-inflation-federal-reserve/#:~:text=The%20bank%20now%20expects%20%E2%80%9Ca,better%2C%20according%20to%20the%20report.

Rick Dennen, President and Chief Executive Officer. “The Reality of Interest Rate Increases.” Inside INdiana Business, 26 Apr. 2022, https://www.insideindianabusiness.com/articles/the-reality-of-interest-rate-increases.