Clouds of a looming recession!


2023-07-22 06:51:58

This month the U.S. Federal Reserve will raise interest rate by 25 basis points to the 5.25%. UAE will follow suit.  

Inflation fell to 3.0% in June from 9.1% last year. While the figures are encouraging, the real battle begins now, as the easy base effects are now behind us. As the disinflationary force of lower energy prices fades, that will leave us dealing with the underlying 4% trend in core ... and to truly crack core will likely require a more significant slowing in the economy.  

While a July rate hike has been baked in for some time, the US Fed’s decision in September isn’t as clear and plenty of data will be released until then. But the decision in September will be a difficult one because the Fed will have to decide whether to get its second hike out of the way or wait for worse signs that inflation is not on track to hit the central bank’s target of 2%. And officials have made clear they want inflation to come down as soon as possible.  

The longer inflation remains elevated, “the greater the risk of inflation expectations becoming unanchored,” according to the minutes from the June meeting. That means there’s a dangerous risk Americans could simply begin to accept permanently higher prices if inflation doesn’t come down soon. Underlying inflation has remained sticky. Rates will stay higher for longer. Interest rate will now peak at 5.50%. The US economy will grow 1.5% this year.  

Expect a U.S. recession within the next year. UAE could follow suit.