An often-overlooked economic gauge showed on Friday that the U.S. economy is headed for — or already in — recession as the Federal Reserve tries to curb inflation with a series of rapid interest rate hikes.
The Conference Board’s index of leading economic indicators showed conditions worsened further in October, with the index down 0.8% from the previous month. This follows a 0.5% drop in September.
“The US LEI fell for the eighth straight month, suggesting the economy is likely in recession,” said Ataman Ozyildirim, senior director of economic research at The Conference Board.
The decline reflects a worsening outlook among consumers, who are increasingly worried about higher interest rates and persistently high inflation, as well as a prolonged downturn in the housing market.
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There is a growing expectation on Wall Street that it will The Fed will trigger an economic recession as it raises interest rates at the fastest pace in three decades to catch up with runaway inflation.
Officials approved a fourth consecutive 75-basis-point rate hike this month, lifting the federal funds rate to a range of 3.75% to 4% — close to cap levels — and have shown no signs of stopping rate hikes.
In a worrying development, the Fed’s rate hikes have so far failed to tame inflation: the government reported this month that the consumer price index rose 7.7% in October from a year earlier and is hovering near a 40-year peak.
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This means the Fed will have to continue its aggressive path, increasing the chances that it will suppress consumer demand and increase unemployment.
“Let me say this,” Fed Chairman Jerome Powell told reporters earlier this month. “It’s way too early to be thinking about a pause. When people hear lags, they’re thinking about pauses. In my opinion, it’s way too early to be talking about a pause in our rate hikes. We’ve got a way to go.”
A rise in interest rates causes higher interest rates for consumer and business loans, which slows down the economy by forcing employers to reduce spending.
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Economic growth has already contracted in the first two quarters of the year, with gross domestic product – the broadest measure of goods and services produced in a country – down 1.6% in the winter. 0.6% in spring.
However, it picked up again in the summer, with GDP growing by 2.6% year-on-year in the three-month period from July to September.