There was good and bad news for investors this week: The good news was that the economy is not sliding into a recession anytime soon, despite Wednesday’s quarter-point interest rate hike by the Federal Reserve -- the tenth hike in the past 13 months. The bad news was the same: The economy is not sliding into a recession anytime soon, despite the most aggressive monetary tightening campaigns in modern history.
With Friday’s news that the economy created 253,000 net new jobs in April, the surprising strength defied expectations. It makes it difficult to imagine that a sharp slowdown will suddenly emerge in the next few months.
The central bank wants to slow the economy to eradicate the dangerous inflation mentality that infiltrated the economy after massive pandemic fiscal stimulus in 2020 and 2021 and subsequently reinvigorated with a vengeance after Russia's invasion of Ukraine caused an oil price spike.
Overall, it is a net positive that a 1000% increase in lending rates -- from .5% Fed funds rate in March 2021 to the current 5% -- has not tipped the economy closer to recession. It unfortunately does drag out the historic rate-hike campaign. However, the surprising resilience gives the central bank time to fine tune its policy aim of wringing inflation psychology from Americans economic mindset while not hitting the brakes so hard that it causes a recessionary cycle. Slow growth and keeping rates high for longer than expected is better than slipping into a recessionary cycle in which the economy shrinks for two or more quarters.
With 9.6 million job openings and 5.7 million American workers looking for jobs, more jobs are about to be filled. More Americans will earn income and spend it, and that will increase the size of the economy. A recession can’t occur when the economy is growing.
The question is: Can the economy expand slowly while monetary policy wrings inflation psychology from the American financial mindset?
The stock market has been holding up, despite the uncertainty. The Standard & Poor’s 500 stock index closed Friday at 4136.25, up +1.85% from Thursday, and down -0.80% from a week ago. The index is up +84.87% from the March 23, 2020, bear market low and down -13.77% than its January 3, 2022, all-time high.
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