The US Federal Reserve is working to fight inflation, but will it cause a recession in the process? Experts share their thoughts on the central bank's way forward.
After 2021's record spending, hard economic news in 2022 has prompted questions about a recession.
Surging energy prices and the ongoing war between Russia and Ukraine have impacted a weakened global economy that is still grappling with lingering pandemic supply chain disruptions.
Inflation reached multi-decade highs earlier this year, prompting central banks around the world to begin raising interest rates. Rates in the US could hit 2.5 percent by year’s end, a move that saw support from President Joe Biden in a May 30 opinion piece printed in the Wall Street Journal.
“First, the Federal Reserve has a primary responsibility to control inflation,” he said.
“My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this.” The head of state concluded by noting that “fighting inflation is the country’s top economic challenge right now.”
But will the Fed’s economic measures be enough to stave off a recessionary period?
At this year’s Vancouver Resource Investment Conference, many of the experts the Investing News Network (INN) spoke to weighed in on the US economy and the likelihood of a recession. Here's what they had to say.
Garofalo: Fed will have to slow ambitious hiking plans
So far in 2022 the Fed has hiked rates twice, with two more 50 basis point increases expected at its upcoming June and July meetings. The question for many market watchers is how far it will be able to get.
David Garofalo, CEO and chairman of Gold Royalty (NYSEAMERICAN:GROY), believes the central bank needs to find a balance between spurring economic activity and implementing measures to combat inflation.
“I think the Federal Reserve is going to be a lot more tentative because of the amount of debt at the sovereign and personal levels. If they raise nominal interest rates too high, that'll lead to stagflation, a deep recession,” he said. He expects a reversal from the Fed in the medium term, and ultimately believes a recession is unavoidable.
“A recession is inevitable, because we've gone through a dozen years or so since the credit crisis of excess in the system — in terms of excess money supply, low interest rates, extreme amounts of debt strapped on both the personal and sovereign levels,” Garofalo explained.
“There is going to be a reckoning — there's going to have to be deleveraging, which will lead to a slowdown in economic activity. That's why I think the Federal Reserve and the other central banks globally are going to have to reverse course in order to try to achieve a soft landing ... I think that's going to be very difficult to actually achieve.”
Hodge: US recession may already be here
This sentiment was repeated by Nick Hodge, editor of Daily Profit Cycle and co-owner of Digest Publishing. The precious metals and energy expert warned investors to be mindful of economic tallies that may look more promising than they really are, noting that the US may already be in recession territory.
“You're comparing GDP numbers from 2021 that were themselves being compared to lockdown numbers in 2020,” Hodge told INN. “So 2021 numbers looked very good because they were being compared to people locked in their homes; commensurately 2022 doesn't look good stacked next to 2021."
With the brunt of the pandemic now over, Hodge said it should be time for economic growth. “And it is, in fact, not growing,” the expert said. “Look at the supply chain, look at the labor shortages that we're facing, look at the prices that consumers are facing. You're very much headed into a recession, like I say, if you're not there already.”
Hodge also offered the definition of a recession as further proof that the US could be in one now.
“The classic definition of a recession is two consecutive quarters of negative GDP growth, and you've had one already — we're smack dab in the middle of the second quarter,” he said.
Depending on the length of a potential recession, Hodge believes gold is poised to benefit, pointing out that the yellow metal performs adversely amid rising interest rates.
“You're in a period of tumult here. I would say you're waiting for the Fed to pivot (and) say, 'We can't raise as many times as we want to because we won't be able to pay off the debt.' Things are starting to break in the bond market, and the consumer can't take it," he said. “And I think at that point, you'll have gold take off in earnest.”
Rule: Bear market = buying opportunity
Rick Rule, proprietor of Rule Investment Media, also sees an opportunity where some may see chaos.
“You know, bear markets really are sales, and if you think that sales are good, then these are good,” said the veteran investor and speculator, who also warned that he is “approaching this one with caution.”
“(That's) because it's been a really long time since the markets have had a real crisis in confidence. And I'm no market forecaster, but part of me suggests this could get worse before it's going to get better.”
While encouraging bargain hunting, Rule did admit that the economy's trajectory has a recessionary tone.
“When you have an economy that has been as much a consequence of both liquidity and confidence as this one has, you're always nervous,” he said, joking that he has successfully called 17 of the last three recessions.
“It wouldn't surprise me to see a recession,” Rule said.
DiMartino Booth: Is the economy a rudderless ship?
Similar to Hodge, Danielle DiMartino Booth, founder and CEO of Quill Intelligence, thinks the world could already be in the midst of a recession despite heightened consumer spending in the US.
She explained that although a “massive bear market rally" is in the works, the globalized nature of the world means the economic slowdown in China and Germany will have a ripple effect.
“American consumers in particular have been supporting spending, absent inflation, keeping up with their wages and incomes — they've been supporting their spending with credit cards,” she said. “We anticipate that the recession that we could very possibly be in right now is going to be a little bit more prolonged, again because of its global nature, and because American consumers are not going down without a fight.”
Not only is consumer spending a factor, but 2021 inventories have also proved to be a detriment this year.
“The main contributors to the third and fourth quarter of 2021’s GDP growth in the US were inventories,” she said. “And we're learning for many retailers across the full spectrum that inventories have swung in the other direction, and oftentimes, as we know, the pendulum swings too far from one side to the other.
“So now companies are sitting on much too much inventory. And that means that the contributions that added so much to GDP growth in the second half of 2021, they're conspicuous in their absence in the first half of this year.”
This absence has already led to a negative print for GDP in the first quarter of 2022.
“And there's every indication, given how quickly consumption is slowing — and we're only midway through the spring quarter — that we could indeed see a second negative print in this quarter, if not in the third or the fourth quarter going forward,” according to the head of Quill Intelligence.
While some are hoping for a soft economic landing, DiMartino Booth is much more pragmatic, noting that Fed Chair Jerome Powell has said that “there are certain things that are out of our control that may preclude this idea of landing the economy softly.”
Tiggre: War, inflation and debt, oh my
While DiMartino Booth is concerned that the Fed won’t be able to steer the economy to safety, founder and editor of the IndependentSpeculator.com Lobo Tiggre has other concerns.
“If we get a recession, it doesn't have to be deflationary,” he said. “Because a lot of the recession camp has been saying, 'Well, that's going to bring prices down.' But what if it doesn't? What if you actually have this economic weakness and prices are still going higher?”
The economic effects of the war in Ukraine are also a factor that Tiggre sees having a significant global impact.
“The sanctions and economic war … are a big deal (and) are not going away,” he said. “So I think the possibility of a recession here instead of a stagflation, which is just kind of weak muddling along and high inflation, but actually, you know, retreating economic action, plus high inflation. I think that's a distinct possibility.”
Like DiMartino Booth, Tiggre explained that the negative Q1 GDP means the US is at least halfway there. “We'll see if there's a negative print in Q2 — that is officially a recession,” he said.
Although most of the experts INN spoke with have little faith that the Fed can navigate a soft landing, Jeffrey Christian, managing partner at CPM Group, advised investors to stay calm.
“You have people saying, 'Well, they're going to either kill inflation and throw us into a recession, or they're going to let inflation run,'” Christian told INN, adding that monetary authorities have spent the last four decades learning deeply about monetary policy management.
“It is quite possible that the Fed will succeed in quelling inflationary pressures, insofar as it's possible for the Fed to do that without throwing us into a recession,” he said.
Don’t forget to follow us @INN_Resource for real-time updates!
Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
- Gold Bounces Back as Fed Finally Hikes, Recession Questions Loom ›
- Gold and Silver ETFs Register Growth as Recession Fears Loom ›