The Federal Reserve’s Aggressive Rate Hikes Start To Crack Economy

The American economy officially slipped into a recession after the negative GDP report

The Federal Reserve’s historic interest rate hikes are starting to stress & ripple across the economy, which has just now statistically entered a recession.

GDP fell at a 0.9% annualized rate in the second quarter, a preliminary estimate from the Bureau of Economic Analysis showed Thursday morning. The numbers follow negative 1.6% GDP growth in the first quarter.

Business fixed investment cratered at nearly a 4% rate in the second quarter, according to the preliminary estimate, a sign that the rising interest rates are taking a toll on investment and growth.

The Fed has embarked upon a historic rate hiking cycle over the past months as it tries desperately to tamp down the country’s gangbusters inflation, which is the highest it has been since the Great Inflation of the early 1980s.

Rate hikes are typically conducted in quarter percentage point intervals, and the first rate hike of that size came in March. The central bank, more aggressive than before, then raised its target rate by half a percentage point in May, followed by historic three-quarter point increases last month and this week.

The combined rate hikes translate to nine typical rate increases in a span of just over four months, moves that have begun to weigh on the economy, as evidenced by the Thursday GDP report.

Investment in housing declined at a 14% rate over the past quarter as homes have become increasingly more unaffordable with mortgage rates popping from the ultralow levels of the pandemic. Nonresidential construction also declined by 11.7% during that same period.

Mortgage rates rose quickly over the past few months as the Fed conducted the rate hikes but have since moderated a bit in response to fears that the economy could enter into a recession.

As of Thursday, the average 30-year fixed-rate mortgage was 5.3%, up 2.5 percentage points from a year before, according to Freddie Mac.

Two consecutive quarters of GDP decline are typically indicative of a recession, although the White House and some economists are pushing back on that notion and highlighting the still-strong labor market. It is worth noting that there haven’t been two consecutive quarters of negative GDP growth since the Great Recession.

The National Bureau of Economic Research, which is regarded by the government and economists as the authority on declaring recessions, defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

NBER has specifically outlined how it doesn’t singularly consider two-quarters of consecutive GDP loss as recessionary, something that the Biden Administration has seized upon. The White House has argued that the country is not in a recession because of the strong labor market.

The economy added 372,000 jobs in June. The unemployment rate also remained at 3.6% in June, matching the low level it was at right before the pandemic.

“Coming off of last year’s historic economic growth and regaining all the private-sector jobs lost during the pandemic crisis, it’s no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation,” President Joe Biden said after Thursday’s report. “But even as we face historic global challenges, we are on the right path, and we will come through this transition stronger and more secure.”

Fed Chairman Jerome Powell has pushed back on the idea that the economy is now in a recession. Speaking Wednesday after the Federal Open Market Committee decided to conduct another aggressive interest rate hike, Powell was asked about the state of the economy.

“I do not think the U.S. is currently in a recession,” Powell told reporters on Wednesday. “And the reason is there are just too many areas of the economy that are performing too well.”

On the flip side, Republicans have gone all-out in declaring the economy is now in a recession because of the rule of thumb. The too-high inflation and possible recession are being used by the GOP as a cudgel against Biden and Democrats heading into the midterm elections.

“New data confirmed what a supermajority of Americans already knew — Democrats have plunged America into a recession,” Senate Minority Leader Mitch McConnell (R-KY) said on the Senate floor. ✪

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