The Fed has long relied on economic data as a primary guide to its decisions, but has it been overly reliant? Has it stumbled in interpreting the data? And has its decision to keep interest rates high thus far actually worsened the current economic situation?
Economists believe that the US Federal Reserve may have misjudged the impact of the pandemic on the economy, as it relied on traditional models to confront unconventional challenges and over-focused on interest rates and ignored other factors affecting the economy, such as the stubbornness of inflation, which was evident, which contributed to exacerbating the state of uncertainty in the markets.
The inflation rate in the United States slowed last June, as the Bureau of Labor Statistics of the US Department of Labor reported that the consumer price index fell to 3 percent on an annual basis, while the consumer price index peaked in June 2022 at 9.1 percent.
At the end of last July, the US Federal Reserve kept interest rates unchanged for the eighth consecutive time at 5.25 and 5.5 percent, while it stopped raising interest rates for the first time in September 2023, after raising them 11 times since March 2022.
The U.S. economy added fewer jobs than expected in July, the annual rate of wage growth slowed, and the unemployment rate rose. Labor Department data showed that the U.S. economy added 114,000 jobs in July, well below expectations of 176,000. The data also revised down the number of jobs added by the U.S. economy in June to 179,000.
Focus on interest and ignore the stubbornness of inflation
Speaking to Sky News Arabia Economy, Dr. Nidal Al-Shaar, economic expert and chief economist at the company, said:ACY“From a scientific and economic perspective, what is happening in the basic economic indicators should have been expected by economic policy makers, and we have repeatedly pointed it out on numerous occasions and for more than a year. The Federal Reserve’s reliance on data and its focus only on interest rates without looking to the future and ignoring the stubbornness of inflation that was clear, is what brought the economy to where it is now.”
We must admit that the latent demand that was created due to the Corona pandemic has come to fruition and could have been fulfilled naturally without intervention, as high demand naturally generates high prices. However, central banks acted in a traditional way in combating this type of unconventional inflation and exaggerated in terms of interest rates and the time to raise interest rates, according to the slogan.
He pointed out that the current slowdown in economic growth is a natural thing and part of a new economic cycle, one of the characteristics of which may be what is called stagflation, one of the causes of which was geopolitical events, starting with the Russian-Ukrainian war to tensions in China and then the current tensions in the Middle East.
Recession fears are real
He believes that the fears of the coming economic recession witnessed by the markets are real fears and should have been expected before the end of the Corona pandemic. He said: “The policy of raising interest rates contributed to reducing inflation rates, but it is clear that its continuation for a long period was not helpful, as this naturally coincided with a decrease in the volume of latent aggregate demand that was formed after the pandemic during the years 2022 and 2023, so it was natural to expect a decrease in this demand.
But this did not happen, and most central banks, first and foremost the US Federal Reserve, believed that this demand was a real demand and should be addressed within traditional tools. Therefore, it would have been more appropriate for central banks to understand the nature of this relationship and the nature of the huge demand that was formed after the pandemic and its time frame, but once again they considered it a recurring economic phenomenon, according to him.
How will the markets be affected?
But the question that imposes itself is: Will the current expectations and fears of recession in global economies affect the markets in the short term? The economic expert and chief economist at the companyACYHe asked the question and answered it himself, saying: “Yes, it will have an impact and we will see other collapses coming. The market in general has a very special advantage, as the information and data available in it are what dominate and are more important than expectations.”
“The world is currently standing in fear and caution of repeating the tragedy of the Great Depression. I don’t think that is an exaggeration, but this may not be equivalent to the Great Depression that occurred at the beginning of the last century because the tools currently available to markets and governments are advanced tools and there is a kind of balance and controls that may prevent a massive collapse in the markets, but there will be a decline and if it does not happen now it may happen in the near future and we must always understand that fear is one of the basic factors that make and shape markets.”
There are those who believe that the markets will rebound positively and that the current situation is temporary. This may be true, but the probability of this happening is low. We are waiting for the reaction of the central banks to this, and it may be an excessive reaction. We do not know that, and this depends on the wisdom of these banks in managing this crisis, which can currently be described as a real, realistic and very influential economic crisis, according to what Dr. Al-Shaar said.
The Fed is waiting for the data and does not know the future
Ali Hamoudi, economic expert, CEO and Chief Investment Officer at “ATA Global HorizonsSpeaking to Sky News Arabia Economy, he said: “There is one fact worth mentioning, which is that Jerome Powell and the US Federal Reserve do not know the future, and they can only respond to what the economic data tells them, which is originally delayed, meaning what happened a month ago and not what is happening now.”
The US jobs numbers in June were higher than expected, but over the past two months we have seen evidence of a slowdown in the US, especially in US consumer activity, and US data has been disappointing compared to previous expectations for a few months, a trend that reached its worst levels in early July, and culminated with the US jobs numbers for July that were released last Friday, which were disappointing and contrary to what the market had expected, according to him.
He explained that the market considered this as a new warning of recession, and it came only two days before the Federal Reserve’s decision to maintain interest rates, which caused great concern among many investors in the market, especially the stock markets.
Difficult phase for stock and commodity markets
“The Fed has already indicated at its meeting last Wednesday that interest rates will be cut on September 18, so the Fed is reluctant to acknowledge the risk that caused the panic by cutting rates before its scheduled meeting in September, so life is likely to be tough for a while in the stock and commodity markets, and the focus should be on whether this sudden drop will create losses on leverage or margin that could cause a series of additional losses,” Hamoudi added.
The only silver lining from July’s dismal jobs report is that it essentially reinforced the first interest rate cut in September, and it raised the odds that the Federal Reserve will cut rates by a larger-than-expected 0.5 percentage point. That should lower borrowing costs on everything from mortgages and auto loans to credit cards.
It is true that many believed that the Fed should have cut rates this month, and since Friday there have been those who have been expecting the Fed to cut rates sooner than the September meeting, or even this week, which I do not believe, because that would cause more panic in the markets, but it is certain that the Fed will end up cutting rates by half a point in both September and November to make up for some of the losses, according to the CEO and CIO of “ATA Global Horizons“
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