Ahead of this week’s FOMC meeting and the likely hike in interest rates that will follow it, the IMF is now warning about the possibility of a global recession. According to the International Monetary Fund, global growth is now expected to decline .4% to a rate of 3.2% in 2021. The decline in growth was the result of several factors. Covid-19 was a major influence on the economic slowdown as well as the war in Ukraine.
The IMF appears to be ringing the alarm bell a bit late. Many have been concerned over a Fed-induced recession for months now. As it looks to combat rampant inflation, the Fed has been raising interest rates aggressively and may continue to do so in the months ahead. The central bank is expected to raise rates by 75-basis points this week while a 100-basis point hike is also a possibility. Should the Fed elect to raise rates by 100 bps this week, it could send a strong message to markets that the Fed means business and intends on staying on course.
Should the Fed stick with another 75-point rate hike, it is still a solid raise and will also show the Fed’s commitment to getting price pressures under control. The Fed may need to preserve its credibility as much as possible. Some are already suggesting the Fed will end up taking a pause after another rate hike or two. The central bank could then decide to reverse course, lowering rates to bolster the slowing economy.
The fact that the IMF is now sounding alarmed may add more pressure to the Fed in the months ahead. The Fed has stated it believes inflation to be the number one enemy of the economy. The Fed seems willing to tolerate a recession right now in order to get inflation under control. The Fed must watch its step carefully, however, as one misstep could send the economy into recession as inflationary pressures remain robust.
Although the IMF still expects positive growth in the years ahead, that growth may depend on how well economies are able to tolerate higher rates and tighter policies. Risks to the economy, cited by the IMF in just April, are now materializing. These include Covid-19 issues, food shortages and more.
The next several months are likely to be bumpy for sure. As the bumps increase, market volatility may do the same. As volatility expands, the desire for physical gold could increase. Although the bears are now in firm control of the daily chart, the bulls have numerous issues that could potentially cause a major reversal.
For the time being, the market still needs to stage a breakout or breakdown from recent levels. The bears are targeting a close below the $1700 level. The bulls need to see a close above $1800 and then the $1900 levels before getting excited. As volatility has shrunk in recent weeks, the market may be getting ready for a major move higher or lower.