Is this the start of the long-awaited US recession? For three years now, financial markets have been living with this spectre, which is rekindled by every bad economic statistic. And economists spend their time changing scenarios, oscillating between soft landing (i.e., a simple slowdown in growth), hard landing (i.e., recession) and no landing (i.e., an economy that continues to grow).
Let's put things in order. In 2022, faced with the return of inflation, the Fed begins a rate hike cycle. From then on, fears of an American recession become a central topic for the markets. Why should this be? Because, historically, this is often the outcome of monetary tightening: the Fed raises rates until something breaks.
Particularly as, at the time, the Fed was determined to bring inflation back down to 2%, regardless of the cost to growth. The dual mandate of price stability and maximum employment was no longer relevant, and the focus was solely on inflation. This voluntarism culminated in the traditional Jackson Hole symposium in August 2022, when Jerome Powell, in a rushed eight-minute speech, promised nothing less than blood and tears. And actions followed words, with a cavalcade of rate hikes, in steps of 50 and then 75 basis points.
But despite the Fed's actions, the US economy continued its mad dash forward, aided by an ultra-expansionary fiscal policy. The result: growth of 2.5% in 2022, 2.9% in 2023 and 2.8% in 2024. A far cry from a contraction in activity. And with all the talk of "American exceptionalism", everyone had finally capitulated to the idea of a US recession.
In recent weeks, however, investors have seen the talk of recession return like a boomerang. Indeed, the first two months of the Trump presidency have been marked by almost daily announcements on tariffs. Not to mention the DOGE's earth-shattering announcements of possible cuts in public spending. All of this is creating a great deal of uncertainty and undermining the confidence of households and business leaders alike. As a result, consumption and investment could be affected, with the ultimate risk of a recession. These fears are reflected in the US equity indices. This week, the S&P500 recorded its first 10% decline since 2022.
But doesn't all this help Donald Trump? Because the consequence of recession fears on the markets is lower long-term interest rates, lower oil prices and a weaker dollar. These are exactly Donald Trump's objectives. He wants lower rates to ease financing costs, lower energy prices to bring down inflation, and a weaker dollar to boost the competitiveness of American companies. It's all a dangerous game. But there's nothing like the threat of a recession to force the Fed's hand and push it to lower rates further. Already, markets are anticipating three rate cuts of 25 basis points between now and the end of the year.
Drawing: Amandine Victor
Author: Antoine Alves d'Oliveira
