FOX Business host Larry Kudlow reacts to the omnibus bill, Sen. Mitch McConnell’s photo op with Biden, and Rep. Kevin McCarthy’s fight to win his bid for House Speaker on the topic of making money.
Persistently high consumer prices, a spate of government spending and a tightening Federal Reserve determined to bring inflation under control, even if it means jeopardizing the US economy, have pundits worried about the possibility of US-style “stagflation”. 1970s this year.
An overwhelming majority of Wall Street investors believe stagflation will be the biggest risk to the global economy in 2023 and will continue to cause volatility in stock markets, according to a recent Bank of America Pulse survey.
Around 92% of fund managers expect a period of high inflation and low economic growth over the next year, while 0% forecast a Goldilocks scenario in which the economy avoids a recession and inflation eases.
“Investor sentiment remained hyper-bearish,” the survey reads. “Investors kept cash holdings up at 6.2%, just below last month’s 21-year high of 6.3%. Also, a net 77% call for a global recession.”
THE US ECONOMY FACES A TURBULENT 2023 WHILE RECESSION FEARS GROW
President Biden appears Wednesday in Covington, Kentucky to highlight his economic plan to rebuild infrastructure and create high-paying jobs that don’t require a four-year degree and revitalize the communities left behind. (Peter Zay/Anadolu Agency via Getty Images/Getty Images)
The responses suggest the stock market could be in for another tough year after central bank tightening, stubbornly high inflation and the Russian war in Ukraine have already unleashed a multi-trillion dollar carnage.
The price surge is being fueled by multiple issues related to government stimulus, the pandemic and the rousing economic recovery after the worst downturn in nearly a century. In the wake of lockdown orders that shut down much of the country, the economy staged a stunning comeback, fueled by unprecedented government spending, emergency Fed measures and widespread vaccine distribution.
Since the pandemic began in February 2020, lawmakers have approved a staggering $6 trillion in pandemic-related stimulus funds. That includes about $4 trillion under former President Donald Trump and about $2 trillion under President Biden, according to a COVID money tracker published by the Committee for a Responsible Federal Budget, a nonpartisan organization based in Washington, DC. has been published
About $5.5 trillion of that has been spent or earmarked for future use.
Additionally, a bipartisan group of lawmakers approved another $1.2 trillion infrastructure bill in late 2021, while Democrats passed another $400 billion spending package on healthcare and climate change in the fall. Congress passed the $1.7 trillion budget bill in December.
The tide of government spending threatens to keep inflation high for some time and undermine the Federal Reserve’s price-cutting measures.
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Federal Reserve Chairman Jerome Powell speaks during a news conference on interest rates, the economy and monetary policy action at the Federal Reserve Building in Washington, DC June 15, 2022. (OLIVIER DOULIERY/AFP via Getty Images/Getty Images)
Fed policymakers have already approved seven straight rate hikes in 2022, taking the benchmark interest rate to its highest level since 2007. With inflation persistently high, policymakers have shown no signs of slowing down and indicated that they intend to keep interest rates high for longer.
“Participants generally noted that a tight monetary policy stance would need to be maintained until incoming data gave confidence that inflation was on a sustained downward path to 2 percent, which would likely take some time,” the am December Fed Minutes released Wednesday. said. “With inflation persistent and unacceptably high, several participants noted that historical experience warns against easing monetary policy prematurely.”
In a worrying development, the Fed’s rate hikes have so far failed to curb inflation: the government reported last month that the consumer price index rose 7.1% year-on-year in November. While that’s a slight decline from a peak of 9.1% in June, it’s still about three times higher than the Fed’s preferred target of 2%.
This suggests that the Fed must continue its aggressive stance, increasing the likelihood that it will rein in consumer demand and increase unemployment. High unemployment, slow economic growth, and hot inflation are all hallmarks of stagflation, a phenomenon that devastated the US economy in the 1970s and early 1980s.
A customer shops at a supermarket in Millbrae, California on August 10, 2022. (Li Jianguo/Xinhua via Getty Images/Getty Images)
Back then, rising oil prices, rising unemployment and loose monetary policy pushed inflation up to 14.8% in 1980 and forced Fed policymakers to hike interest rates to almost 20% that year.
Expectations are growing on Wall Street that the Fed will trigger an economic downturn as it hikes interest rates at its fastest pace in three decades to catch runaway inflation.
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Rising interest rates tend to result in higher interest rates on consumer and business loans, which slows the economy by forcing employers to cut spending.
Goldman Sachs, Deutsche Bank, Bank of America and Wells Fargo are among Wall Street banks forecasting a downturn this year, but the severity of it remains uncertain.