According to Federal Reserve economists, the recent banking turmoil will likely cause a mild recession later this year, which could potentially be a significant concern for President Joe Biden as he enters an election campaign.
The staff members at the central bank have been expecting GDP growth to slow this year due to the Fed’s efforts to fight inflation. However, the chances of a downturn have increased over the past month.
Two regional lenders, Signature Bank, and Silicon Valley Bank, collapsed a few weeks before the Fed’s March 21-22 meeting. This caused depositors to withdraw billions of dollars in cash, which sent tremors throughout the banking industry.
The Fed’s projection is for “a mild recession starting later this year, with a recovery over the subsequent two years.” This recession would lead to a rise in unemployment, but the economy is expected to fully recover by 2025.
It is important to note that predicting economic outcomes is never certain, and the Fed staff members have expressed uncertainty about their projections.
If banks do not pull back on lending as much as they expect, then the economy might not deteriorate as much. However, if the financial system faced even more stress, the prognosis could be much worse.
The staff also noted that historical recessions related to financial market troubles tend to be more severe and persistent than average recessions.
The actual policymakers with a say in rate policy are not entirely forecasting a recession. Their median projection is for the U.S. economy to grow 0.4 percent, a rate so slow that it could quickly dip negative.
They also expect unemployment to rise roughly a percentage point, consistent with an economic contraction.
The Fed officials expect the recent bank failures to lead to less free cash flow through the economy as lenders become less willing to part with their money, which could act as another rate hike.
The Fed is considering whether another rate hike will be needed when they meet in May or if borrowing costs are high enough to bring inflation down over time.
In March, the Fed’s rate-setting committee members stated that it was too early to assess with confidence the consequences of credit tightening on economic activity and inflation and that it was essential to continue to closely monitor developments.
Should Americans Be Worried?
While the Federal Reserve economists have projected a mild recession later this year, it’s important to note that economic projections are always subject to change and uncertainty.
However, the possibility of a recession should be a cause for concern for Americans, especially those who are already struggling economically. The projected jump in unemployment and slow GDP growth could lead to significant financial hardship for many households.
Individuals need to assess their own financial situations and prepare accordingly, such as by saving more and reducing debt. Additionally, government officials and policymakers should be taking steps to mitigate the impact of the potential recession and support those who may be most affected.
Can Cryptocurrencies Help Against Recessions?
There is some debate over this. Some argue that crypto’s decentralized nature and lack of government control make them more resistant to economic downturns. Others argue that their volatility and lack of widespread adoption make them unreliable as a recession hedge.
On the one hand, some investors believe cryptocurrencies can serve as a safe haven asset during economic uncertainty, similar to gold or other precious metals.
They argue that cryptocurrencies like Bitcoin’s limited supply and decentralized nature make them a more reliable store of value than government-backed currencies, which can be subject to inflationary pressures.
Additionally, some argue that cryptocurrencies can be used as a means of payment and exchange even in the midst of a recession, allowing individuals to bypass traditional financial systems that may be experiencing difficulties.
On the other hand, there are concerns that cryptocurrencies are too volatile to be a reliable recession hedge. The value of cryptocurrencies can fluctuate wildly in response to market news or sentiment, making them difficult to predict or rely on for long-term investment.
The lack of widespread adoption also means they may not be useful for exchange or payment during a recession, as many individuals and businesses may hesitate to accept them.
Overall, it remains to be seen how cryptocurrencies will perform during the next recession or economic downturn.
Related Reading:
- Exploring The Ongoing Elitism In The City Of London
- Web3’s Gender Gap: A Crisis of Inequality
- Why Islamic Finance is Growing Strong in the Face of Global Market Turmoil
- In Tanzania and Senegal, Digital Banking Leaves Many Feeling Excluded and Powerless
