Today’s Fed meeting will be crucial to decide the short-term future of the American economy, including a possible recession.
Corporate bankruptcy reached a 13-year high as the S&P 500 Global Market registered 54 failures in May alone. In 2023 alone, 286 firms filed for bankruptcy up from 138 in May 2022, a 56% increase.
The S&P 500 index has been rallying for the entire month of May, mostly driven by the new AI craze. Indeed, the rally was caused by the "magnificent seven" of American corporations, including NVIDIA which passed the $1 trillion evaluation mark.
The rest of the market actually slowed down, with 93 of the Nasdaq 100 stocks amounting to just 15% of growth.
The increasing corporate failures in the United States are driven mostly by the American Federal Reserve’s monetary tightening.
To fight inflation, the Fed has raised interest rates since March 2022, hitting the 5% level at their meeting in May. Not only did the hikes almost cause a banking crisis, but they also actively destroy American businesses.
The hardest-hit sectors are industry (+138% failure rate since March), healthcare (+78%), and finance (+57%).
- Source: Goldmine News
Nevertheless, it’s the bitter medicine American corporations deserve. Recent data shows that corporate greed and refusal to lower prices keep inflation high. And Fed Chairman Jerome Powell always prioritized fighting inflation even if it caused a recession.
To raise or not to raise
Today, the Fed will hold its monthly meeting to decide on future monetary policy. As of Tuesday, markets predict a 97% chance they will not raise rates again, opting for either stabilization or a cut.
The decision might stem from yesterday’s data on lower US inflation than expected. The American consumer prices index fell to 4% year-on-year in May. Though core inflation remains stable at 5.3%, this value has never dropped below 5% since 2010.
For these reasons, the Federal Reserve will likely stop monetary tightening, salvaging both the banking system and the remaining S&P 500 firms.
Though all indicators are in favor of stopping hikes, it remains a highly risky decision. Interest rates are keeping inflation at bay and no time indicators for reaching the 2% target exist yet.
For the moment, the United States would either fall into a mild recession or avoid it entirely. But things could change fast, and today’s Fed meeting will be crucial for the global economy in the following months.
On the other side of the Atlantic, the European Union faces less uncertainty, but also less optimism. The Eurozone fell into a recession and the European Central Bank does not intend on stopping interest rate hikes.
The European crisis will worsen in the coming months. Will the US stay out of it?
