- The Fed is aggressively raising interest rates to fight skyrocketing inflation
- Experts fear the increases will trigger a recession and stagflation
- Economic signs warning of recession are flashing
Runaway Inflation Leads to Aggressive Rate Hikes
Economists had once hoped inflation would cool off by this summer. Then Russia invaded Ukraine. Now, the economic outlook has darkened. Prices for gasoline, food, and other raw materials continue to rise.
The economy’s lingering struggles caught the Federal Reserve by surprise. In response, they decided to pursue aggressive interest rate hikes to curb inflation. Experts now fear the rapid increases could stall the economy and bring on a recession.
The Biden administration is giving the Fed a lot of leeway. They know there isn’t much else they can do. Some Democrats worry about killing growth in the middle of a midterm election year. But inflation is even worse for them politically. Recent polls show that price spikes are by far the top concern among voters. 1
Experts Warn of Recession
Fed Chairman Jerome Powell said that they can tame inflation without collapsing the economy. He cited 1965, 1984 and 1994 as examples. However, history points to a recession. Since 1961, the central bank has raised interest rates to tame inflation nine times. Eight of those times resulted in a recession. 2
Larry Summers, the former US Treasury Secretary, accused the Fed of “wishful and delusional thinking.” He finds “absurdity” in the central bank’s forecast for inflation to rapidly cool off in a red-hot jobs market.
Summers previously warned that Fed policy put the US economy on a path towards stagflation. Stagflation is the toxic mix of weak growth and high inflation. It plagued the US economy in the late 1970s and early 1980s.3
Moody’s Analytics chief economist Mark Zandi said stagflation is a “low-probability” event. He said the Fed would do whatever it took to avoid it. This includes stopping inflation by crashing the economy. “If it looks like we’re going into stagflation,” Zandi said, “the Fed will push us into recession.”4
J.P. Morgan currently puts the odds of recession at roughly 30% to 35%. The historical average is about 15%.5
Recession Warning Sign Flashing
Yield curve inversions are when short-term bond yields exceed those of longer-term bonds. The spread between the 5-year and 30-year Treasury yields briefly inverted on Monday. This hasn’t happened since 2006. It flipped on fears that aggressive rate hikes would stunt the economy.
Yield curve inversions are rare. They are viewed as a good recession predictor because they reflect investor fear about the economy’s long-term prospects. Every recession in the past 60 years was preceded by an inverted yield curve. This is according to research from the Federal Reserve Bank of San Francisco.6
Preparing for Recession
The underlying economy could be strong enough to handle a few rate hikes. But with a 1 in 3 chance of a recession, it is best to be prepared.
Gold is proven to hold its value as the economy contracts during a recession. During the Great Recession, the Producer Price Index (PPI) for gold rose 2.6 percent in 2008. It increased 12.8 percent in 2009. Overall, between 2008 and 2012, the value of gold increased dramatically. Gold had a 101.1-percent surge in the PPI. It set a then record high of $1,917.90 an ounce in August of 2011.7
If you are interested in hedging against the likelihood of a recession, contact a precious metals specialist at AHG about a Gold IRA today.