The U.S. Federal Reserve’s commitment to addressing inflation without triggering a recession is being tested. This week introduces three fresh hurdles – a sweeping autoworkers strike, the looming shadow of a federal government shutdown, and the reintroduction of student loan repayments after a pandemic-induced hiatus.
A Perfect Storm
The United Auto Workers (UAW) union has made a bold move, launching a strike against all three of the major U.S. automakers.
This started with the mobilization of around 13,000 workers at three plants, and these numbers have the potential to expand significantly.
Government Standstill and Debt Resumption
Meanwhile, federal officials face a ticking clock, with a deadline of September 30 to prevent a government shutdown.
The added layer of complexity comes from congressional Republicans, who are currently stalling negotiations.
To further thicken the plot, student loan repayments, which have been paused for three years due to the COVID-19 pandemic, are set to resume in October.
Potential Economic Impact
If viewed in isolation, each of these events might appear manageable.
However, their cumulative effect, combined with an already anticipated economic slowdown in the latter part of the year, raises alarms.
Recession Threat Looms
These consequences could have a broad impact, including less spending by consumers, higher car prices that hurt the Fed’s efforts to control inflation, and a shake-up in business and consumer confidence.
These combined events could decide if the economy has a smooth landing or faces a more significant downturn.
Goldman Sachs’ Forecast
Goldman Sachs, usually optimistic about the economy, is now sounding a warning.
Their economists expect a bumpy fourth quarter that could reduce GDP growth by over one percentage point.
Although they still predict a 1.3% annual growth rate, their numbers are much lower than what the Fed expected in June and differ from many other private sector forecasts.
Fragile State of the Economy
Vincent Reinhart, Chief Economist for BNY Mellon Asset Management, has voiced concerns over the fragile state of the economy, citing the aggressive Fed interest rate policies, the tightening grip on credit, and the dwindling pandemic-era savings.
Tightening Financial Conditions
For Reinhart, the slightest shock can lead to an economic deviation.
Furthermore, he points out that the reduction of the Fed’s balance sheet has now reached a stage where it could inadvertently tighten financial conditions, posing yet another risk.
Meeting Expectations and Economic Indicators
In its upcoming meeting, the Federal Reserve seems poised to retain its policy rate at a range between 5.25%-5.5%.
The Fed’s journey through the recent months, despite being fraught with challenges, has seen a silver lining with inflation rates subsiding even as the economy has been growing above the expected trend.
Bright Spots Amid Challenges
Coupled with a consistent addition of jobs each month, the economy presents a mixed picture of potential growth and lurking dangers.
Concerns Over Strikes and Shutdowns
Potential disruptions from strikes involving as many as 146,000 auto workers and a government shutdown affecting up to 800,000 federal employees (who would go without paychecks) cast dark shadows on growth prospects.
Auto Industry and Bargaining Tensions
Analysts are wary, noting that the current circumstances are uniquely precarious.
Michael Pearce, a leading U.S. economist for Oxford Economics, has expressed that any strike could be particularly detrimental. This is because the auto supply chains are still getting back to normal, and workers want to make up for the money they lost due to inflation, even though the auto industry booming.
Long-term Impacts and Consumer Behavior
The trajectory of these events and their long-term impact remains uncertain.
Some suggest that reduced consumer spending could paradoxically aid the fight against inflation.
Shifts in Spending Habits
On the flip side, experts like Ian Shepherdson and Kieran Clancy from Pantheon Macroeconomics suggest a different perspective.
They point out a potential change in how people spend, noting that more money is going toward the U.S. Department of Education, while searches related to travel and leisure have decreased.
Facing Persistent High Rates
If the economy does stumble, the Federal Reserve’s safety nets will remain shelved until the inflation battle is won, compelling businesses and families to grapple with persistent high-interest rates.
Fed’s Recession Strategy
Preparations have been ongoing, as the institution has been living with and strategizing around this recession risk for over 18 months.
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