The Bureau of Economic Analysis released its second quarter report Thursday morning stating that the GDP fell 0.9%. Beth Ann Bovino, U.S. Chief Economist for S&P Global Ratings, joins Cheddar News to discuss the main takeaways from the latest GDP data, and the Fed raising interest rates amid surging inflation.

Closing Bell

U.S. GDP Shrinks by 0.9% in Q2, Raising Recession Fears

Welcome back to cheddar news is closing bell. Everyone while President biden speaking on inflation and the latest GDP data earlier this afternoon. What were the big takeaways while the president introducing an inflation bill and saying that he doesn't think that we're in a recession. This comes as an initial read does show that the U. S. Economy shrank for a second straight quarter in the second quarter of this year. And the Bureau of Economic Analysis releasing its second quarter report this morning showing that GDP did fall 9/10 of a percent. Well, joining me now is Beth ann bovino U. S. Chief economist at S. And P. Global ratings beth and thanks so much for coming on the show. From your perspective, this is the technical definition of a recession. Do you think that the U. S. Economy is in one? No, I don't. Uh There's three things that the Bureau National Bureau of Economic Research looks for. They look for the so called three D. S duration. What is it um duration, depth and diffusion this right now? We have two of them, but we don't have diffusion housing is where it's being hit. But in other areas, consumer spending, other factors are still holding up. And of course the jobs market is incredibly strong. So right now, I don't think we're there. Not yet anyway. Uh the president outlining that plan to fight inflation with the report of key senators here on capitol hill, Are you optimistic that that bill could do anything to bring down prices, which of course is the primary focus for the Fed right now, Well more power to them as all I can say. But I think right now this is all for this is all the Fed's mandate. The Fed, the way we control prices, particularly when we're looking at it as a supply chain disruption factor, meaning we just can't get the goods. All we can do is slow demand. And that's what the Feds doing. They're raising interest rates. And that's why when we look at the housing market, which was the biggest hit for a second quarter GDP when we look at the housing market, home prices are incredibly high, but now borrowing costs are high. Why? Because of the Fed and the Fed? It seems to have indicated that they're going to keep moving in that direction, meaning that our concern is a recession could very well be on the way. You know, it is pretty impressive that the stock market has seen some strong follow through today. We've seen a really strong day yesterday beth in the wake of this decision by the Fed in that press conference and then again, rising today a near obsession high after these comments from the President and just an overall more optimistic tone than it sounds like the U. S. Economy. There are still strong pockets here within the overall economic picture, like the jobs market for instance. Um Is this the report that the Fed wanted to see because I think this report would indicate if we're not in a recession at least the Fed's aggressive monetary policy and rate rises are starting to have an impact in slowing spending. I think that the Fed is looking for particularly housing housing is one of the benchmarks of the economy. People buy a house, What do they do? They have to put stuff in it And then of course that just snowballs if we see housing slow well consumer consumer spending will slow as well. And that's I think one of the one of the factors that the that the Fed is looking for slowing things down, they do want to see the jobs market softened as well. That could be painful for some people who are looking for a job. But with the unemployment rate at what 3.5 to 3 and 3.6% we have the Fed can actually push it up with not feeling that they can threaten with. Right? And we had certainly heard from jerome Powell yesterday that even though the jobs market is currently very strong tight supply high demand that we could see it start to slow here in the months ahead. I want to talk about inflation of course the bed wants to get inflation down. You think it starts with the housing sector beth But 9.1% gain in consumer prices that we saw in June and I think Fed chair jerome how a little wishy washy yesterday as to whether or not that inflation number is actually peaked. What's your take? Well I think that the the C. P. I. Numbers and of course the other the one that the Fed loves to look at which is the personal consumption expenditures deflator. They're both at four times or three times uh there where the Fed would like them to be. And of course the Fed is concerned. One of the reasons why they moved at 75 basis points last uh in june was because they got spooked by what what they saw it didn't stabilize. Uh Now the Fed, I think the the caution there of course and one of the reasons why what I took what I took away was that the Fed became really indicated that they were going to be very aggressive and continue to raise rates they planned to take it to where the where they seemed to indicate in june 3.5 to. Well actually I think almost a 3.8% for the federal funds rate. I think markets might have been happy that we didn't see 100 basis point hike that they thought that that might have been reasonable by the Fed. But in my mind the Fed is going to be incredibly aggressive and that's why I'm concerned that the this this expansion could turn back into recession sometime down the road. Okay, let's take a listen quickly at what the Feds are had to say yesterday about the path forward beth It is essential that we bring inflation down to our 2% goal if we are to have a sustained period of strong labor market conditions that benefit all while another unusually large increase could be appropriate at our next meeting. That is a decision that will depend on the data we get between now and then. We will continue to make our decisions, meeting by meeting and communicating and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation. Okay, Beth so what we're hearing there from the Fed Chair is likely by the end of the year after what might be another sizable rate rise in september that the Fed is going to slow its pace down collectively, rates might be a full percentage point higher by year end from here. Do you think that that's aggressive enough? That is right now, that that is the concern that we have. I think right now we have about, I think we're looking at 3, 3.5 to 3 75 by mid 2023. Uh Could it be too little? Possibly so? And that's where the risk of a much more three recession could happen now, we don't have right now we have a 45% chance of recession almost like flipping a coin. But the worry, of course, as you pointed out, is that if the Fed goes too slow, then they're going to have to speed up next year. And that means much worse conditions for the U. S. Going forward. Alright, Beth Ann bovino, U. S, chief economist at S. And P. Global ratings. Thank you so much for coming on.