Double recession… economic and inflationary

In addition to the existing concerns about inflation levels in the global economy, it seems that the fear of stagflation is beginning to loom on the horizon, and this is perhaps a higher risk than a mere rise in price levels. The problem here is that there is an economic slowdown while price levels and their growth rate remain at high levels, which is known as stagflation, which leads to a decline in economic activity and high unemployment while prices remain at high levels.
The US Federal Reserve is facing one of the biggest challenges it has gone through in several years, and it is the apparatus that is trying desperately to control inflation rates through almost its only weapon, which is to control the interest rates in the country. The banking crisis in the past few weeks confused the scene and left expectations about the course of the US economy. The possibility still exists for more bank collapses, because the continuation of interest rates at their high levels will inevitably lead to the surrender of some banks with weak positions, and thus to more collapses and the acceleration of the spread of their contagion. .
There is no doubt that the increase in interest rates from 0 to 5 percent in less than a year, and the resulting deterioration in banks’ investments in debt instruments, will become more complicated if interest rates continue to rise. According to the latest economic developments, the Federal Reserve is likely to raise interest rates by a quarter of a percentage point next month, which means that the possibility of stopping raising interest rates decreases, and certainly the possibility of cutting interest rates fades away, as some had hoped.
Economic indicators are still working against the Federal Reserve. We saw a decline in the unemployment rate in the latest report this week from 3.6 to 3.5 percent, due to an increase in the number of jobs for March by 236 thousand jobs, noting that the unemployment rate is constantly declining from 15 percent. cent during the Corona pandemic so far.
The rise in the number of jobs and the rise in wages are not something that is welcome by the Federal Reserve, because the unemployment rate is currently at historically low levels, and it is known that there is an inverse relationship between the rates of unemployment and inflation, as a decline in unemployment leads to a rise in inflation, or in a more accurate sense, an increase in inflation It comes with high levels of employment, what is known as the Phillips curve.
Despite this, there are signs that some analysts see as indicating an imminent significant decline in employment levels, including declines related to employment announcements, as well as a decline in vacancies, which fell below ten million for the first time since mid-2021. There is also a slight increase In the number of claims for job losses, which reached 228 thousand claims last week alone, knowing that the Federal Reserve expects – or hopes – that the unemployment rate will rise to 4.5 per cent by the end of this year.
What will “make matters worse” in the coming period is that the problem of the debt ceiling of the US government will resurface on the scene, and this would complicate the economic scene and threaten the integrity of the financial system, as the debt ceiling set at a maximum of $31.4 trillion will prevent the federal government from continuing to borrow. . The problem here is not only the huge amount, but the net interest on these debts exceeds 450 billion dollars annually, and they are expected to rise further in the coming years with the rise in interest rates and with the growing levels of deficit in the annual budget.
The positive point here is that the bond market still indicates a decline in interest rates, as there are continuous declines in interest rates on government bonds with multiple maturities, as the ten-year bond yield is now 3.3 percent, which touched 4 percent last month, and it was higher than 4.3 percent last October, indicating that investors in the bond market believe that long-term interest levels will be under control.