Further Fed Rate Hikes Will ‘Trigger Severe Recession,’ Warns Musk

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Further Fed Rate Hikes Will ‘Trigger Severe Recession,’ Warns Musk
Tesla CEO Elon Musk and his security detail depart the company’s local office in Washington, on Jan. 27, 2023. (Jonathan Ernst/Reuters)
Naveen Athrappully
5/2/2023
Updated:
5/2/2023
0:00

Industrialist Elon Musk is warning that the United States is already in a recession that could turn “severe” with even more rate hikes by the Federal Reserve, pointing to bank failures as proof of a stressed-out economy.

“Fed data has too much latency. Mild recession is already here,” Musk stated in a tweet on April 30. The billionaire referred to the ongoing crisis in the banking sector, suggesting that the bank failures point to the Fed’s rate-hike policy stressing the economy. “It’s not like just the canary in the coal mine (SVB) died, one of the staunchest miners (Credit Suisse) died too and the cemetery is filling up fast! Further rate hikes will trigger severe recession. Mark my words.”

“Between Tesla, Starlink and Twitter, I may have more real-time global economic data in one head than anyone ever,” he added.

Musk was responding to a tweet by former U.S. Treasury Secretary Larry Summers who said that the odds of a recession happening over the next 12 months could be 70 percent if the Federal Reserve keeps doing whatever is necessary to contain inflation.

Silicon Valley Bank (SVB) collapsed in March after high interest rates hit the bank’s bond portfolio and a bank run pushed it into a liquidity crisis.

Signature Bank soon followed in SVB’s footsteps and collapsed. More recently, First Republic also crashed, marking the second-largest bank failure in American history.

Despite the banking crashes, President Joe Biden insisted on May 1 that the American banking system is “safe and sound.”

In March, Luke Ellis, chief executive of Man Group, one of the largest publicly traded hedge funds, warned that the turmoil triggered by SVB’s collapse is not over and that a “significant number” of banks could fail over the next two years.

Fed Rate Hikes

Over the past year, the Fed has pushed up its benchmark interest rate by 475 basis points in an attempt to rein in inflation. The federal funds rate is now in a range of 4.75–5.0 percent, up from 0.25 percent in March 2022.

Even though the move has pushed down inflation from 8.3 percent to 5.0 percent during this period, it is still far above the Fed’s target of 2 percent.

In a March 27 weekly commentary (pdf), investment firm BlackRock pointed out that markets have been quick to price in rate cuts by the Fed due to the banking turmoil. However, the firm “doesn’t see rate cuts this year.”

On March 22, the Fed raised interest rates for the ninth time in a row despite the banking crisis. “We think the Fed could only deliver the rate cuts priced-in by markets if a more serious credit crunch took hold and caused an even deeper recession than we expect,” the report stated.

The Fed’s “latest projections imply a recession in the months ahead, with growth stalling later in 2023 after a strong start to the year ... The Fed still doesn’t plan to cut rates because inflation is persistently above its 2 percent target. So it is expecting to live with lingering inflation even with recession.”

Recession in United States

Major banks see the United States entering a recession this year. During an earnings call on April 14, Jane Fraser, Citigroup CEO, said that the country will likely slip into a shallow recession during the latter part of 2023. In case of a severe credit crunch, the recession could be “exacerbated in depth and duration.”

During an earnings call on April 18, BofA CEO Brian Moynihan said that every sign is pointing to a mild recession.

Nonprofit think-tank The Conference Board sees the probability of a U.S. recession as “elevated.” The organization’s probability model predicts a 99 percent likelihood of a recession in the country over the next 12 months, according to a post on April 12.

The latest data from the Bureau of Economic Analysis (BEA) show that the American economy only expanded by 1.1 percent in first quarter 2023, which is a slower growth rate compared to the 2.6 percent rate in fourth quarter 2022.