FED MINUTES: A RECESSION ON THE WAY

The minutes from the March meeting of the Federal Open Market Committee noted potential negative consequences from the failure of Silicon Valley Bank. U.S. Bank Deposits fell 4.9% over the past year, which is the largest decline in history. When people put less money in the bank, banks have less money to lend. When people have less access to money, they spend less and that slows the economy down.

Warren Buffet, and Vice Chair for Supervision Michael Barr have said the banking sector “is sound and resilient.” Primarily because depositors are protected.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the meeting summary said.

What to expect during a recession:

• Increase in unemployment rate: During a recession, businesses may slow down or shut down completely, leading to a decline in demand for workers. This can result in job losses and an increase in the unemployment rate.

• Decrease in consumer spending: When people are worried about their job security and financial stability, they are less likely to spend money. This can lead to a decrease in sales for many businesses.

• Reduction in business profits: Companies may suffer from decreased sales, which can lead to a decrease in profits. This may cause businesses to cut costs, including laying off employees or reducing their wages.

• Stock market volatility: A mild recession can cause the stock market to become volatile. Investors become worried about the future of businesses because of the economy.

• Potential increase in government intervention: In an effort to stimulate economic growth, governments may take measures such as lowering interest rates or increasing spending. However, this can lead to an increase in debt and may have long-term consequences.

Important to note:

National debt in the United States just hit a record $31.5 trillion, up over $8 trillion since 2020. The total federal debt per household is now $240,000. We now have a higher Debt/GDP ratio than post-World War 2 at 120%.

According to the US Treasury, “the rise in Debt/GDP indicates current fiscal policy is unsustainable.”

The United States national debt is the total amount of money owed by the federal government to its creditors, which includes both domestic and foreign entities. The national debt is the result of the government borrowing money to fund various initiatives, such as infrastructure projects, military spending, and social programs. War is expensive.

There are various proposed solutions to the national debt crisis, including reducing government spending, increasing taxes, and encouraging economic growth. However, these solutions can be politically challenging to implement and require cooperation and compromise from both major political parties.

It’ll be interesting to see the government manage spending to stimulate the economy after a recession, with a massive amount of debt. Since the US is the world's largest economy and a pillar of the global financial system, a default would have far-reaching effects on financial markets all over the world.

A default would likely damage the US economy and slow down growth, which could lead to job losses, wage cuts, and widespread economic hardship. Not to mention ruin the reputation the US has as a safe haven for investors world-wide.

INFLATION IS IMPROVING

U.S. inflation is on the way down. Core CPI is down to 5% after nine consecutive decline in the year over year rate of change. This was the lowest reading since May 2021. That’s good news for Americans, and good news for mortgage rates.

Annual wholesale inflation readings have made significant improvement as they continue to move lower in the right direction. At its peak last March, PPI was at 11.7% year-over-year and it is now at 2.7% - a decline of 9%. That’s huge. PPI is now at its lowest level since February 2021.

Article Written and Provided by Padi Goodspeed, SVP at Cross Country Mortgage