Recession fears mount on latest Fed minutes

The latest Federal Reserve meeting minutes published on Wednesday appear to indicate the U.S. economy is heading toward a recession.

The minutes showed the central bank is maintaining its cautious stance on inflation, with officials in agreement that rate cuts shouldn’t take place this year. “In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy,” according to a meeting summary.

Investors have been eagerly awaiting the release of the Federal Open Market Committee (FOMC) minutes from last month’s meeting to provide a greater understanding of the factors used by the FOMC for future policy decisions.

As I was quoted by Market Watch, Morning Star, Mena FN, Investor Ideas, Value Walk, Share Wise and African Eye Report, amongst other media, the minutes suggest officials remain hawkish and are particularly concerned about the country’s tight labour market.

To my mind, Wednesday’s minutes will provide further support for the Fed to keep rates higher for longer than previously priced-in by the markets. Indeed, with the U.S. labour market not cooling as fast, the December meeting minutes appear to show a significant shift in tone from the November minutes.

Hopes for an economic soft landing have been quashed by these latest minutes, and concerns are now mounting amongst investors that the Fed may now overtighten and drive the U.S. economy into recession.

Naturally, the Fed will say the rate hikes need to continue to revert inflation to target. Yet it must also be cautious that the tight labour market doesn’t detract from the bigger picture and continue to overdo rate rises, which would result in a deeper, longer U.S. recession. Of course, this would have a massive negative impact on the global economy.

The tone of these minutes suggests the U.S. central bank is not done hiking rates as yet and will keep tightening until more progress is made on bringing inflation back towards the target. Inflation is clearly still the number one concern, not economic growth risks.

The next focus for investors will be Friday’s jobs report for additional information on how the U.S. economy is performing during the central bank’s rate hikes. Economists forecast the U.S. economy will have gained around 200,000 jobs in December, a drop from 263,000 in November, indicating the Fed has some room to continue tightening without overwhelming the jobs market.

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