Ignoring the Red Flags: How the Fed’s Focus on Inflation May Trigger a Recession

Maria Irene

The Federal Reserve, often referred to as the Fed, plays a crucial role in managing the US economy. Lance Roberts, a financial expert, has written an article expressing concern that the Fed is overlooking critical warning signs of an impending recession. Understanding the situation can help you make informed decisions about your financial future.

Roberts points out that the Fed is currently focused on fighting inflation, which is the rate at which prices for goods and services increase over time. The Fed’s target inflation rate is 2%, but it’s currently higher than that. In response, the Fed has tightened lending conditions, making it more challenging for businesses and consumers to borrow money. Tightening lending standards is often a precursor to a recession, a period of economic decline.

The author also highlights that while the economy appears to be strong based on recent employment and retail sales data, this strength is mostly an illusion. Over the past couple of years, there has been a massive influx of money into the economy through fiscal and monetary stimulus. This has created a temporary boost in economic activity, but it won’t last forever.

As the economy slows down, consumers will likely take on more debt to maintain their standard of living. This is problematic because increasing debt levels can lead to deflation, a decrease in the general price level of goods and services. According to Roberts, the Fed and the government don’t seem to understand that their monetary and fiscal policies are deflationary when they rely on debt to fund them.

One way to see this effect is by looking at “monetary velocity,” which measures how quickly money is used to buy goods and services. When the velocity of money is high, it’s a sign of a healthy, expanding economy. Low monetary velocity is associated with recessions and contractions. Roberts shows that with each monetary policy intervention, the velocity of money has slowed, indicating a weakening economy.

The article also notes that the suppression of interest rates has not stimulated economic activity as intended. Instead, increasing the “debt burden” has detracted from economic growth. Several recession indicators are ringing alarm bells, including inverted yield curves and manufacturing and production indexes.

Roberts emphasizes two key indicators related to economic expansions and recessions. The first is a composite economic index consisting of over 100 data points. Historically, when this index falls below 30, it suggests that the economy is either in a significant slowdown or a recession. The second indicator, the 6-month rate of change of the Leading Economic Index (LEI), confirms the slowdown.

For investors, the reversal of monetary stimulus could lead to lower asset prices. As the economy weakens and the Fed continues to raise interest rates to combat inflation, the more significant threat is deflation caused by overtightening monetary policy.

In the past, periods of high inflation have been followed by very low or negative inflation (deflation). During a deflationary recession, earnings typically decline as monetary policy slows economic growth. It’s important to note that periods of Fed tightening have never had a positive outcome on earnings, and it’s unlikely that this time will be any different.

Recession indicators suggest that the Fed may be on the verge of causing an unwanted economic downturn by ignoring warning signs and focusing too much on inflation. As an investor, staying informed about these issues and understanding their potential impact on your financial future is essential.

Please note that this article aims to provide a simplified explanation of Lance Roberts’ insights on the Fed’s policies. For a more comprehensive understanding and to view charts, check out the original article by Lance Roberts here:

https://realinvestmentadvice.com/recession-indicators-says-the-fed-will-break-something/

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Maria Irene
Maria Irenehttp://ledgerlife.io/
Maria Irene is a multi-faceted journalist with a focus on various domains including Cryptocurrency, NFTs, Real Estate, Energy, and Macroeconomics. With over a year of experience, she has produced an array of video content, news stories, and in-depth analyses. Her journalistic endeavours also involve a detailed exploration of the Australia-India partnership, pinpointing avenues for mutual collaboration. In addition to her work in journalism, Maria crafts easily digestible financial content for a specialised platform, demystifying complex economic theories for the layperson. She holds a strong belief that journalism should go beyond mere reporting; it should instigate meaningful discussions and effect change by spotlighting vital global issues. Committed to enriching public discourse, Maria aims to keep her audience not just well-informed, but also actively engaged across various platforms, encouraging them to partake in crucial global conversations.

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