Federal Reserve member Barkin made important statements today, addressing both cryptocurrency investors and the current state of the market. He offers a significant analysis regarding recent data and recession concerns. So, what did he say today?
Fed Statements
Bloomberg and various expert analysts from different companies claim that the US will experience a significant recession period in the coming months. A recession slows down the economy, increases unemployment rates and negatively impacts risk markets. Therefore, it is a worrisome situation for cryptocurrency investors as well.
Barkin stated the following on this matter;
“Are we entering a recession? You cannot completely ignore the possibility of a recession. It is only a matter of timing. However, I understand why concerns have increased today. The pandemic’s financial support is decreasing, and inflation is pushing the Fed to raise interest rates. Those who closely analyze the signals point to the yield curve, which predicted eight out of the last seven recessions. What makes predicting a recession so difficult is that this problem seems to never disappear. In fact, the response I just gave is word-for-word from a speech I made last summer. I know that quoting yourself is a bit self-referential, but it makes sense to repeat the same speech.”
Barkin drew attention to target postponements related to these predictions;
“Predictions are constantly being pushed forward. For example, respondents to a survey conducted by Bloomberg economists in November 2022 expected a recession in the first quarter of this year. This prediction was moved to the second quarter in January and to the third quarter in May. The Conference Board’s Leading Economic Index, a historically reliable indicator, has been deteriorating in each of the past 15 months, predicting a recession. However, despite the Fed raising interest rates by 525 basis points in the last 17 months to combat inflation, which currently stands at around 4%, there has been no recession. GDP grew by 2.4% in the second quarter, remaining strong thanks to consumer spending. High-income consumers are still spending, and rising wages are supporting consumption. The labor market has also remained resilient, with an unemployment rate of historically low 3.6%.”
Will the US Enter a Recession?
While predictions are being postponed, Barkin emphasized the absence of the expected recession in the first part of his speech. Then, he explained why we haven’t seen an economic slowdown as interest rates continue to rise. According to him, the pandemic caused a deadlock in the economy, and that is the reason.
“Businesses have been facing significant challenges for the past few years. More fundamentally, they are still seeing healthy demand from their customers and working on accumulated orders. The manufacturing and construction sectors are also receiving support from government investments in infrastructure and similar areas. If your business is healthy, why would you lay off workers or reduce production? At the same time, consumers financed by excess savings accumulated during the pandemic, increased equity and housing wealth, and a strong labor market continue to spend. The drop in gasoline prices this year has released additional spending capacity. In June, the Transportation Security Administration set a new daily record in the number of scanned passengers. Barbie made $162 million in revenue in the first weekend. Taylor Swift went on a billion-dollar tour. Consumer spending accounts for 68% of the economy and, as seen in the latest strong retail sales report, it is still far from weak, although it has weakened.”
So, what about the fight against inflation?
“Inflation is still very high. If there is one thing we have learned in the past two years, it is that inflation is painful and everyone hates it. They hate uncertainty. They hate feeling unfair. And frankly, they find it exhausting. It can be said that our efforts to combat inflation have already pushed many sectors into mini recessions. Interest-sensitive sectors such as housing and manufacturing have slowed down. Commercial real estate (especially offices) is in a difficult situation. Banks have experienced turbulence. Low-income individuals are buying and slowing down their spending because their savings have decreased. Further slowdown seems almost certain on the horizon. A series of financial support programs from the pandemic period are ending. Interest rate increases are occurring with a delay; many models predict that their effects will begin to be seen at the moment. In addition, as banks maintain liquidity and protect their earnings by stepping back from marginal loans, credit conditions have tightened, reducing consumer and business spending capacity.”
What does Barkin expect for the future?
“The slowdown in spending can be mitigated by hidden demand. Homes and cars have become expensive and hard to find. However, in a weakening economy, if supply expands, I suspect we can find a range of buyers who have postponed their purchases for the past few years and are ready to spend. And the start of a prolonged slowdown can reduce costs. Businesses have planned for a slowdown in the past year and this year. They have slowed down their hiring, adjusted their costs, managed inventory levels, and postponed investments. Banks have reduced marginal loans. Many consumers have tightened their belts. Therefore, if a recession occurs, the economy will find itself less vulnerable. Even if a recession does not occur, today’s conservatism can bring about tomorrow’s revival. It can even be claimed that the recent strengthening in the economy is partially supported by businesses, consumers, and governments outperforming recession predictions. These gains may also increase consumer sensitivity. Finally, of course, there is still a reasonable story that inflation will normalize in the short term and the economy will overcome an additional trauma. For the past few weeks, there has been much talk about the potential called a ‘soft landing.’ Undoubtedly, last month’s inflation data was good, and hopefully, it is a sign. Of course, the Fed’s aim is not to cause a recession; our mission is to lower inflation. If you do not control inflation, we learned in the 70s that it comes back even stronger.”
