According to Kristalina Georgieva, head of the IMF, loans in the US are not yet declining, so this is not an economic cooling. And so the US Federal Reserve must continue to raise interest rates. While this is often bad news for investors, Georgieva is right, according to Rabobank macroeconomist Philip Marey.
Fed Chief Jerome Powell said early last month that banks would become more cautious about lending money after the collapse of Silicon Valley Bank, among others, which would in turn slow the economy. “But we haven’t seen much of it so far,” Marey says. “And so it looks like that eventually has to continue with rate hikes.”
“A recession is probably approaching”
According to Marey, the fact that people are still borrowing money indicates how strong the US economy is, underscoring that the economy is seriously overheated. And the only way to cool it is to raise interest rates. “And with that, a recession is probably approaching after all.”
Long term
Marey is well aware that interest rate hikes affect the economy at a slower pace, but he also believes that this is where the big problem lies. For this reason, Fed Chief Jerome Powell wanted to slow down, “to wait for it all to finish,” he continues. “But half of the ECB’s policy council wants to go ahead, so there’s a good chance the Fed will have to fix that.”
And if the Fed does that, the chances of excessive interest rate hikes and a recession will increase. “It’s hard to cool an economy without triggering a recession,” Marey says. “So it was still an unrealistic starting point. But the possibility of a recession increases this way.’
Room
And there’s still plenty of room, Marey thinks. Inflation in the US currently hovers around five percent, as does the official rate. “So in real terms, adjusted for inflation, interest rates are still around zero,” Marey says. “So it doesn’t mean much yet. On balance, I think we can add a whole percentage point, without it becoming exceptional from a historical point of view.’
Source: BNR
Sharon Rock is an author and journalist who writes for 24 News Globe. She has a passion for learning about different cultures and understanding the complexities of the world. With a talent for explaining complex global issues in an accessible and engaging way, Sharon has become a respected voice in the field of world news journalism.
