Hawkish Powell Pumps Interest Rates by 25 bps – Stock Market Dive Sparks Recession Talk

Key Takeaways:

• Fed raised interest rates by another 25 bps.
• The decision triggered a stock market decline.
• As a result, experts claim the recession is inevitable.

YEREVAN (CoinChapter.com) – The Federal Reserve raised interest rates by 25 bps during the Federal Open Market Committee (FOMC) meeting on May 3, meeting market expectations. Subsequently, the stock market dove 1.4% after Fed Chair Jerome Powell’s speech, sparking a new wave of recession talk.

Fed Chair Raises Interest Rates to Over 5%

Powell commented that the 10th consecutive interest rate hike is by the lawmakers’ focus on bringing consumer prices down while staving off ballooning unemployment.

Our focus remains squarely on maintaining the dual mandate to promote maximum employment and stable prices for the American people. My colleagues and I understand the hardship that inflation is causing and we remain strongly committed to bringing inflation down to the 2% goal.

Powell said.

There are no promises in this, but it just seems to me that it’s possible that we can continue to have a cooling in the labor market labor market without the big increases in unemployment that have gone with many prior episodes.

asserted the Fed Chair in his speech.

Much like his speech in late March, the Chair pointed out that the banking system remains “sound and resilient.” However, Powell also asserted that the Fed would monitor the sector tightly to prevent similar failures in the future.

Notably, the statement came after the First Republic Bank fiasco, the second-largest bank failure since the Silicon Valley Bank contagion sent depositors scrambling in early March.

Also read: US Debt Ceiling Crisis update: Joe Biden to Meet House Speaker Kevin McCarthy to prevent default by June. 

Stock Market Drops in the Wake of Fed Decision

After the speech was released, the US collective stock market index S&P 500 (SPX) declined by 1.4%, recoiling from a key resistance. The Fed struggles to balance a thin line between runaway inflation and recession. Thus, the decline could start another leg down as experts ring recession bells again.

According to David Rosenberg, the president of Rosenberg Research and former chief North American economist at Merrill Lynch, a recession is imminent.

The leading indicators are telling me that the recession is actually starting this quarter. […] It’s certainly not a 2024 story. A recession is […] a haircut to national income. It’s as if the whole country takes a pay cut. It’s not that we take the Lamborghini from 80 down to 20. It’s that we go in reverse.”

said Rosenberg.

Federal Reserve economists are also predicting a mild recession later this year, “with a recovery over the subsequent two years,” according to the Fed’s March 21-22 meeting minutes.

Also read: Oil Plunges Below $69.

However, the Fed economists expect the pain to endure longer than usual due to the banking crisis. “Historical recessions related to financial market problems tend to be more severe and persistent than average recessions,” they noted in the minutes.

Notably, the head of SpaceX, Tesla, and Twitter, Elon Musk, called the looming recession “severe.”

“Mild recession is already here. Further rate hikes will trigger a severe recession. Mark my words,” said Musk, citing Fed’s latency in real-time data. On that note, the multibillionaire added, “Between Tesla, Starlink & Twitter, I may have more real-time global economic data in one head than anyone ever.”