J.P. Morgan Raises Recession Risk to 35%, Predicts Major Fed Rate Cuts Amid Slowing U.S. Economy

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As a seasoned crypto investor with a knack for understanding the intricacies of economic trends, I find the latest J.P. Morgan report both intriguing and slightly unsettling. Having weathered multiple market cycles, I’ve learned that economic reports often serve as roadmaps, guiding us through the twists and turns of the crypto market.

On August 15th, 2024, J.P. Morgan Research released a report indicating that the U.S. economy might be slowing down after an unusually robust year of growth. The report drew attention to a weaker-than-anticipated July employment report, where unemployment rates rose for four months in a row. This data led to a market drop and heightened worries about the possibility of a recession.

In light of these recent trends, J.P. Morgan Research has revised its prediction, raising the likelihood of a U.S. and worldwide recession occurring before the end of 2024 to 35%. This is an upgrade from the 25% probability indicated in their mid-year report. Bruce Kasman, J.P. Morgan’s Chief Global Economist, emphasized that key components of the growth projection are encountering difficulties. He highlighted signs of a more pronounced decrease in U.S. labor demand and early indications of job reductions. Furthermore, recent business surveys indicate a slowdown in global manufacturing and in the Eurozone, which were initially anticipated to boost growth this year.

As a researcher, I acknowledge Kasman’s points, yet I find it noteworthy that conventional signs of an economic downturn, such as persistent profit margin compression, credit market distress, and disruptions in energy or financial sectors, are conspicuously absent at present. However, it seems these mitigating factors have only moderately elevated the short-term risk of a recession to 35%.

Looking to the future, the report suggests a 45% chance that a recession may take place by the end of 2025. Kasman underscored that while acknowledging extra risks, especially in the political realm, J.P. Morgan Research has not revised its estimation of the likelihood of a recession in 2025.

The report additionally discussed modifications in predictions about inflation and interest rates. As inflation decreases, J.P. Morgan Research has revised their probability to 30% that the Federal Reserve will continue with elevated interest rates for a prolonged duration, dropping from 50% two months earlier. Kasman clarified that the slight uptick in recession risk is at odds with a major adjustment in the perspective on interest rate forecasts, stemming from alterations in growth and inflation risks that undermine the slow strategy suggested by central bank guidance.

Kasman pointed out a favorable change in the U.S.’s inflation risk situation, attributing it to robust supply-side growth and decreasing labor market demand. He emphasized that wage inflation in the U.S. is decelerating at a faster pace than in other advanced economic regions, and American unit labor costs are moving towards the Federal Reserve’s inflation objective. These trends imply that the Federal Reserve’s current monetary policy is tight.

According to Kasman’s analysis, it seems that he suggests abandoning the gradual approach taken by the Fed is reasonable, as J.P. Morgan Research predicts they could lower interest rates by 100 basis points by year-end. However, he warned that these rate reductions might not be mirrored worldwide, because the shift in inflation risk primarily concerns the U.S. Kasman clarified that unless there’s simultaneous adjustment in key economic factors and financial market conditions globally, the effects of Fed policy changes on other economies would likely remain minimal. Consequently, the potential departure from gradualism in the Fed’s policy may not be observed as widely across different regions.

Tony Sycamore, an analyst at IG Markets, told Cointelegraph that Goldman Sachs’ slight modification in recession likelihood assessment is not expected to cause a substantial increase in risk-taking behavior across different asset groups, such as cryptocurrencies.

Markus Thielen, research chief at 10x Research, told Cointelegraph that while Bitcoin traders could be encouraged by a potential interest rate reduction, there’s also a possibility it signals an upcoming recession. If true, Bitcoin might follow a downward trend as it did in 2019. Thielen points out that when the Federal Reserve lowered rates in July 2019, Bitcoin initially rose by 20%, but this increase was short-lived. Even with two more rate cuts later in the year, Bitcoin ended 2019 with a 35% drop from its peak following the first rate cut.

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2024-08-19 11:43