U.S. Recession Fears Grow As Costly Fed Rate Stumps Borrowings

Inflation is at a 40-year high. Stock prices are sinking. The Federal Reserve is making borrowing much costlier. And the economy actually shrank in the first three months of this year, Christopher Rugaber reported for the Associated Press (AP).

Photo Insert: The clearest sign that a recession might be nearing, economists say, would be a steady rise in job losses and a surge in unemployment.

By mid-2023, the Fed’s benchmark short-term rate, which affects many consumer and business loans, could reach levels not seen in 15 years. Analysts say the US economy, which has thrived for years on the fuel of ultra-low borrowing costs, might not be able to withstand the impact of much higher rates.

“Recession risks are low now but elevated in 2023 as inflation could force the Fed to hike until it hurts,” Ethan Harris, global economist at Bank of America, said in a note to clients.

The nation’s unemployment rate is at a near-half-century low of 3.6%, and employers are posting a record-high number of open jobs. So what might cause an economy with such a healthy labor market to suffer a recession?

Here’s what the path to an eventual downturn could look like: The Fed’s rate hikes are sure to slow spending in areas that require consumers to borrow, with housing the most visible example. The average rate on a 30-year fixed mortgage has already jumped to 5.25%, the highest level since 2009; borrowing costs for businesses are rising, as reflected in increased yields on corporate bonds.

At some point, those higher rates could weaken business investment; falling stock prices may discourage affluent households, who collectively hold the bulk of America’s stock wealth, from spending; falling share prices also tend to diminish the ability of corporations to expand, and; rising caution among companies and consumers about spending freely could further slow hiring or even lead to layoffs.

If the economy were to lose jobs and the public were to grow more fearful, consumers would pull back further on spending and the consequences of high inflation would worsen this scenario. Wage growth, adjusted for inflation, would slow and leave Americans with even less purchasing power.

Though a weaker economy would eventually reduce inflation, until then high prices could hinder consumer spending, and; eventually, the slowdown would feed on itself, with layoffs mounting as economic growth slowed, leading consumers to increasingly cut back out of concern that they, too, might lose their jobs.

The clearest sign that a recession might be nearing, economists say, would be a steady rise in job losses and a surge in unemployment.

As a rule of thumb, an increase in the unemployment rate of three-tenths of a percentage point, on average over the previous three months, has meant a recession will eventually follow.

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