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Recession Threatens as Rising Costs Hit Consumers

Note: This article may contain commentary or the author's opinion.

Threats of a recession looms as powerful forces threaten US economy. Jamie Dimon CEO of JP Morgan Chase has recently begun saying there is a chance of a recession hitting. He cites the federal reserve’s stance on monetary policy as a factor in a significant increase in the risk of recession. The Federal Reserve has said that it intends to fight high inflation by sharply raising interest rates and shrinking its balance sheets recently.

In Europe, expensive energy markets are making it harder for consumers and factories to use energy or produce things. In China, COVID-19 has prompted authorities to lock down in one of the strictest measures yet. “Those are very powerful forces, and those things are going to collide at one point,” he said. “No one knows what’s going to turn out.”  JP Morgan Chase revealed that it had set aside approximately $902 million in reserves due to a probability of downside risk. This allotment for credit reserves had reduced chases profiles by 42% from over a year ago.

Dimon isn’t the only one that thinks a recession is possible in the next coming weeks. Former Treasury Secretary Larry Summers noted that the situation is very similar to pre-recession periods from times gone by. He said that a recession shock was inevitable. On Thursday Goldman Sachs also announced a drop in profits by approximately 42%. Meanwhile citigroup’s earnings had reduced by 46%. Citigroup announced that it was setting aside approximately $1.9 billion for risks related to its ties overseas.

The economy in the United States has been overheating. The annual rate of inflation is at 7.9% according to official statistics, although by some estimates it could be as high as 17%. However hourly wages have only gone up by 5.6% according to government statistics. There’s twice as many jobs available to anyone who’s unemployed. This is the highest ratio the United States has had of jobs to unemployment in the past 70 years.

Throughout 2021 most American bankers had hoped the labor force would return after pandemic was over. They believe that this transition back to full employment would help to cool the labor market. However, only slightly more than half of missing workers have returned. This has caused wage growth which is still on the rise. This wage growth is probably due to rising prices which are hurting living standards of workers.

The Federal Reserve is expected to raise its interest rates to more than 2.5% in December and to continue above 3% in 2023. Additionally, it is following a plan to reduce its 8.5 trillion bond holdings starting in May of 2022. This would reduce it faster than during the quantitative tightening last time. This will threaten the growth of the economy. Historically the Fed has had a difficult time cooling down the jobs market without putting the economy into a recession. A soft landing has only happened three times since 1945 and never while battling high inflation numbers. Given this record it’s likely we will see a recession within the next two years. It’s unlikely that workers will start working for less money or that prices will go back down. Even if the Fed does raise inflation interest rates above 3% in 2023, the most likely scenario is that wages will continue to increase because employers will still need workers. In turn this will lead to higher prices with spiraling inflation.

 

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