Politics

Correction or Recession?

Benjamin Swistun 

Contributor

Jerome Powel (Chairman of the Federal Reserve) spoke on January 26, 2022, about the inflation crisis that is hitting America right now. All western nations have experienced an increase in inflation within the last year. This is due to supply chain issues and continuous money printing without sizable economic growth. The goal for year-to-year inflation of the American Federal Reserve is 2%. December 2021’s numbers were 7%, the worst figure seen since the June of 1982. America has had three consecutive monthly increases above 6%. There are two ways the Central Bank or Federal Reserve can slow these increases.  

Canada has also had recent issues with inflation. Having the highest levels in 30 years. The Bank of Canada announced in December of 2021 it would no longer continue its policy of quantitative easing. Quantitative easing is practiced among many western nations. It is the process by which a Central Bank can increase the amount of currency in the money supply by buying government bonds. The removal of quantitative easing will have a moderate short-term effect on inflation but will work in the long run.  

The more direct way to slow down inflation is to increase interest rates, slowing down borrowing. This is what Jerome Powel announced the Federal Reserve would be raising rates by March 2022. The market immediately sold off. By finally admitting that inflation was here to stay, investors changed their strategies.  

Innovative high-growth companies that were trading at high earnings multiples or, even more speculatively, price to sales multiples, took the biggest hit. The number one element investors are looking for is pricing power: the ability to raise prices with inflation without losing customers. Companies who are not “essential” (some people consider Netflix subscriptions to be “essential”) in everyday life cannot raise their prices without hurting their sales. But still, well-established Blue-chip companies are also down. This is common phenomenon when there is a sharp selloff in the markets. Hedge Funds and Banks need to generate cash and cover their losses, making them also sell quality stocks that shouldn’t be affected by inflation. This drives the market down even further as hysteria sets in. Recently these established companies have settled themselves, and are now flying high and dry, away from a down market. While the newer companies are in the gutter. This has the signs of a correction, but the market should have never gotten this bad.  

Under the Trump era in Washington, he tried everything in his power to keep rates low. He was able to achieve this with consistent supply growth. But as COVID-19 continued and lockdown measures occurred, more stress was put on the global supply chain. The government continued to pump out currency like the economy was booming, but it wasn’t. Stores became empty and people began getting ready to do things once again. As the economy reopened and people were allowed to spend the velocity of the money increased, shocking the supply chain further. Leading to the state we are in now where items are out of stock and inflation is rampant. If more decisive action isn’t taken soon, it could become a recession.  

Note: Nothing stated in this article is investment advice, or is meant to be taken as such .

Photo Credit: Adrian Wyld/The Canadian Press