A top U.S. economy is warning that the U.S. economy could plunge into a recession soon due to a major “policy blunder” that the Federal Reserve carried out.
On Sunday, Allianz’s chief economic advisor, Mohamed El-Erian, said that he has fears that the U.S. economy could be spiraling out of control after a very dismal report about unemployment that was released last week.
He placed the blame for that report squarely in the laps of the central bank, which has refused to lower interest rates, despite warning signs starting to emerge. The Fed has been aggressively raising interest rates for the last two years in an attempt to stamp out inflation.
While that has worked somewhat, the Fed has held off on lowering interest rates for fears that inflation could raise again. They had originally announced that there would be three rate decreases in 2024, but later revised that down to only one drop.
But, that could be way too little, way too late, according to economists like El-Erian, as the economy is starting to feel the significant effects of that interest rate policy.
Making an appearance on Bloomberg TV on Sunday, the economist said the Fed should’ve already lowered interest rates. He said:
“I really do worry that we may lose U.S. economic exceptionalism because of a policy mistake.”
U.S. markets have been plummeting since last week’s unemployment report, and markets around the world have followed suit.
The latest jobs report showed that the July unemployment rate was the highest it’s been since back in October of 2021. That caused the major tailspin in global markets, as people all across the world fear that the economy in the U.S. is sputtering.
Intel, for instance, reported a drop in shares by almost 19%.
Goldman Sachs’ economists have raised the likelihood that the U.S. could slip into a recession in the next year to 25%, from its initial projection of 15%. JP Morgan analysts are even more confident in a recession, giving it a 50% chance of happening in the next year.
Many experts believe that the only way the economy can be saved from a recession at this point is by the Fed instituting a major cut in interest rates way sooner than they had originally planned.
When interest rates are lower, it’s easier for individuals and businesses to borrow money, which ends up boosting the economy. The challenge is that the effects of Fed cuts don’t often affect consumers and businesses until months after the rates are actually cut.
Analysts at Goldman Sachs said they expect that the Fed will cut interest rates by 25 basis points. That being said, a larger cut could be on tap if the next jobs report shows that the unemployment rate in August was even worse than it was in July.
JP Morgan analysts sung a little bit different of a tune, writing in a memo:
“[Because] the Fed looks to be materially behind the curve, we expect a 50 [basis point] cut at the September meeting, followed by another 50 [basis point] cut in November.”
