Recession Fears Loom Over U.S. Economy

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You can also read this news on BH NEWS: Recession Fears Loom Over U.S. Economy In a recent discussion on CNBC, Neel Kashkari, who leads the Minneapolis Federal Reserve, raised alarms about th

In a recent discussion on CNBC, Neel Kashkari, who leads the Minneapolis Federal Reserve, raised alarms about the heightened threat of a recession in the United States. He shed light on the worries permeating among businesses, both large and small, in his jurisdiction as the economic climate remains fraught with uncertainty.

What is the Impact of Economic Uncertainty on Investments?

The ambiguity about trade taxes is a significant factor unsettling businesses, Kashkari pointed out. This lack of clarity prompts companies to delay new ventures. Even though firms are capable of adjusting to fixed trade policies, the ongoing uncertainties make it perilous for the economy.

This cautious stance from businesses, echoed by consumers’ hesitation, threatens imminent economic growth. Consequently, fears of an unforeseen downturn in the economy are rising.

Could Trump’s Policies Trigger Stagflation?

Concerns about the economic strategy under former President Donald Trump were reiterated by Austan Goolsbee, President of the Chicago Federal Reserve Bank. He warned that such policies might usher in stagflation, a troubling mix of stagnant growth, inflation, and rising unemployment.

Austan Goolsbee: “We warn that Trump’s policies could cause a period of economic slowdown with rising prices.”

Kashkari acknowledged the significant challenge for the Federal Reserve would be combating persistent inflation alongside an ailing economy. He emphasized prioritizing the battle against inflation as crucial under these circumstances.

Neel Kashkari: “I’m worried about the high inflation persisting in the U.S. and other developed countries for four years. As policymakers, we need to take protective steps to ensure inflation remains around our 2% target.”

How is the Fed Responding to Inflation and Stagnation?

Inflation that outpaces forecasts over recent years highlights the need for doubtless caution against short-term disruptions, Kashkari argued. Long-term price stability, rather than isolated incidents of trade tax-induced hikes, ought to guide the policy framework of the Fed.

The specter of a stagnating economy is causing consumers and businesses to hold back, with economic growth bearing the brunt. Anticipated Fed measures will likely navigate these complexities in future policy directions.

The post-pandemic economic landscape remains sensitive to global shifts. With trade regulations and inflation apprehensions at the forefront, they are expected to continuously influence economic discourse.

Business activities are increasingly cautious amid uncertain trade policies.
Consumer and company actions will shape the macroeconomic trajectory.
Federal Reserve policy decisions are crucial for sustenance of economic stability.

Rising economic risks in the U.S. urge businesses towards more cautious decision-making. The unpredictable nature of trade policies and sustained high inflation pose challenges for short-term investment and employment decisions. Throughout this process, the Federal Reserve’s strategies are pivotal to maintaining economic equilibrium, while the responses of businesses and consumers remain significant in steering macroeconomic outcomes.

Source: CryptoSlate

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Christopher Hayes

A U.S. trade court on Wednesday blocked President Donald Trump's tariffs from going into effect, ruling that the president overstepped his authority by imposing across-the-board duties on imports from nations that sell more to the United States than they buy.

The Manhattan-based Court of International Trade said the U.S. Constitution gives Congress exclusive authority to regulate commerce with other countries that is not overridden by the president's emergency powers to safeguard the U.S. economy.

"The court does not pass upon the wisdom or likely effectiveness of the President's use of tariffs as leverage. That use is impermissible not because it is unwise or ineffective, but because [federal law] does not allow it," a three-judge panel said in the decision.

The Trump administration minutes later filed a notice of appeal

The ruling came in a pair of lawsuits, one filed by the nonpartisan Liberty Justice Center on behalf of five small U.S. businesses that import goods from countries targeted by the duties and the other by 13 U.S. states.

The companies, which range from a New York wine and spirits importer to a Virginia-based maker of educational kits and musical instruments, have said the tariffs will hurt their ability to do business.

The White House and lawyers for groups that sued did not immediately respond to requests for comment.

Stephen Miller, a White House deputy chief of staff and one of Trump's lead policy advisers, rebuked the court in a brief social media post, writing: "The judicial coup is out of control."

At least five other legal challenges to the tariffs are pending

Oregon Attorney General Dan Rayfield, a Democrat whose office is leading the states' lawsuit, called Trump's tariffs unlawful, reckless and economically devastating.

"This ruling reaffirms that our laws matter, and that trade decisions can’t be made on the president’s whim," Rayfield said in a statement.

Trump has claimed broad authority to set tariffs under the International Emergency Economic Powers Act (IEEPA), which is meant to address "unusual and extraordinary" threats during a national emergency.

The law has historically been used to impose sanctions on enemies of the U.S. or freeze their assets. Trump is the first U.S. president to use it to impose tariffs.

The Justice Department has said the lawsuits should be dismissed because the plaintiffs have not been harmed by tariffs that they have not yet paid, and because only Congress, not private businesses, can challenge a national emergency declared by the president under IEEPA.

In imposing the tariffs in early April, Trump called the trade deficit a national emergency that justified his 10% across-the-board tariff on all imports, with higher rates for countries with which the United States has the largest trade deficits, particularly China.

Many of those country-specific tariffs were paused a week later. The Trump administration on May 12 said it was also temporarily reducing the steepest tariffs on China while working on a longer-term trade deal. Both countries agreed to cut tariffs on each other for at least 90 days.

Trump's on-and-off-again tariffs, which he has said are intended to restore U.S. manufacturing capability, have shocked U.S. financial markets.

The U.S. dollar rose against both the Swiss franc, a traditional currency safe-haven, and the Japanese yen following the court decision.

Reporting by Dietrich Knauth and Daniel Wiessner; Editing by Sandra Maler

Source: Reuters

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Benjamin Carter

New Zealand’s central bank could hold the Official Cash Rate steady at its next policy decision in July, Governor Christian Hawkesby said.

“The main message we were looking to get to markets was that, when we next meet in July a further cut in the OCR is not a done deal, it’s not something that’s programmed in,” Hawkesby told Bloomberg Television Thursday in Wellington. “We’re really more in a phase where we are taking considered steps, data dependent. The markets need to follow developments really closely to get a feel for what it means for us.”

The Reserve Bank on Wednesday reduced the OCR by 25 basis points to 3.25%, taking total cuts since August to 225 points, and lowered its forecast track for the benchmark rate, suggesting it could drop below 3%. But the bank also removed an explicit easing bias.

That prompted investors to pare bets on further the OCR reductions. They now see just a 32% likelihood of a cut at the July 9 meeting, and only a slim chance of it falling any lower than 3% this year, swaps data show.

Hawkesby said the OCR has already fallen “a long way” and is now in a neutral zone where it neither curbs nor stimulates economic activity.

He said US tariffs are likely to damp New Zealand’s economic recovery by curbing global demand for its exports and delaying investment decisions, but stressed the high level of uncertainty around the outlook.

“We think New Zealand’s in good shape at the moment. We have high agricultural export prices, we have interest rates that have fallen a long way and that’s really underpinning an economic recovery that we’re experiencing,” he said. “Facing into that is the global uncertainty. For us, it means a much more modest recovery than otherwise.”

Source: Bloomberg Europe

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James Whitman

Economic

Political

President Donald Trump’s proposed reciprocal trade tariffs on major U.S. trading partners were blocked by a federal court on Wednesday, on the grounds that the president overstepped his authority.

The Court of International Trade ruled on Wednesday that Congress held exclusive authority to regulate commerce with other countries, and that Trump’s emergency powers did not supersede this authority.

Wednesday’s ruling was on a lawsuit filed by the Liberty Justice Center on the behalf of five small U.S. businesses that import goods from the countries targeted by Trump’s tariffs.

The trade court ruled that the International Emergency Economic Powers Act (IEEPA), which was invoked by Trump to carry out his tariff agenda, did not grant the president sufficient authority to impose “unlimited tariffs on goods from nearly every country in the world.”

“The court does not read IEEPA to confer such unbounded authority and sets aside the challenged tariffs imposed thereunder,” the court said in its ruling.

Wednesday’s ruling poses a fresh challenge for Trump’s agenda to impose steep trade tariffs on countries with large trade surpluses with the United States.

Trump had initially unveiled his planned tariffs in early April– what the president dubbed as “liberation day.” Trump announced double-digit levies on several major U.S. trading partners, and also targeted countries he alleged were trade proxies for China.

But he had shortly after announced a 90-day extension in the planned tariffs, except for China. Trump’s tariffs on China rose as high as 245% in April, before Washington and Beijing agreed to deescalate earlier in May.

Source: Investing

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Manuel

Bond

Economic

Investors are getting nervous the U.S. government might struggle to pay it’s debt — and they are snapping up insurance in case it defaults.

The cost of insuring exposure to U.S. government debt has been rising steadily and is hovering near its highest level in two years, according to LSEG data.

Spreads or premiums on U.S. 1-year credit default swaps were up at 52 basis points as of Wednesday from 16 basis points at the start of this year, LSEG data showed.

Credit default swaps are like insurance for investors. Buyers pay a fee to protect themselves in case the borrower — in this case the U.S. government — can’t repay their debt. When the cost of insuring the U.S. debt goes up, it’s a sign that investors are getting nervous.

Spreads on the CDS with 5-year tenor were at nearly 50 basis points compared with about 30 basis points at the start of the year. In a CDS contract, the buyer pays a recurring premium known as the spread to the seller. If a borrower, in this case, the U.S. government defaults on its debt, the seller must compensate the buyer.

CDS prices reflect how risky a borrower seems and are used to guard against signs of financial trouble, not just a full-blown default, said Rong Ren Goh, portfolio manager in Eastspring Investments’ fixed income team.

The recent surge in demand for CDS contracts is a “hedge against political risk, not insolvency,” said Goh, underscoring the broader anxiety about U.S. fiscal policy and “political dysfunction,” rather than a market view that the government is verging on failing to meet its obligation.

Investors are pricing in the increased concerns around the unresolved debt ceiling, several industry watchers said.

“The credit default swaps have become popular again as the debt ceiling remains unresolved,” said Freddy Wong, head of Asia Pacific at Invesco fixed income, pointing out that the U.S. Treasury has reached the statutory debt limit in January 2025.

The Congressional Budget Office said in a March notice that the Treasury had already reached the current debt limit of $36.1 trillion and had no room to borrow, “other than to replace maturing debt.”

Treasury Secretary Scott Bessent said earlier this month that his department was tallying the federal tax receipts collected around April 15 filing deadline to come up with a more precise forecast for the so-called “X-date,” referring to when the U.S. government will exhaust its borrowing capacity.

Data from Morningstar shows that spikes in CDS spreads on U.S. government debt have typically aligned with periods of heightened worries around U.S. government’s debt limit, particularly in 2011, 2013 and in 2023.

Wong pointed out that there are still several months before the U.S. reaches the X-date.

The U.S. House of Representatives has passed a major tax cut package which could reportedly see the debt ceiling raised by $4 trillion, pending approval from the Senate.

In a May 9 letter, Bessent urged congressional leaders to extend the debt ceiling by July, before Congress leaves for its annual August recess, in order to avert economic calamity, but warned “significant uncertainty” in the exact date.

“There is still enough time for the Senate to pass its version of the bill by late July to avoid a technical default in U.S. Treasury,” added Wong.

During the debt ceiling crisis in 2023, the U.S. Congress passed a bill suspending the debt ceiling just days before the U.S. government entered into a technical default.

In the past, the U.S. has come dangerously close to a default but in each case, Congress acted last minute to raise or suspend the ceiling.

Fiscal reckoning

The surge in CDS prices is likely a “short-lived” reaction while investors wait for a new budget deal to raise the debt limit. It is unlikely a sign of an impending financial crisis, according to industry watchers.

During the 2008 financial meltdown, institutions and investors actively traded CDS linked to mortgage-backed securities, many of which were filled with high-risk subprime loans. When mortgage defaults soared, these securities plummeted in value, resulting in enormous CDS payout obligations.

However, the implications for soaring demand for sovereign CDS are very different compared to demand for corporate CDS which was the case in 2008, where investors were making an actual call about growing default risk at corporations, said Spencer Hakimian, founder of Tolou Capital Management.

“Traders seem to believe that CDS provides a speculative instrument for betting on a government debt crisis, which I view as extremely unlikely,” said Ed Yardeni, president of Yardeni Research, who added that the the U.S. will “always prioritize” paying interest on its debt.

“The U.S. government won’t default on its debt. The fear that it might do so is not justified,” he told CNBC.

Moody’s earlier this month downgraded the U.S. sovereign credit rating to Aa1 from Aaa, citing the government’s deteriorating fiscal health.

Should the Senate pass the bill in time, the massive ceiling increase will push up the Treasury supply, putting the U.S. fiscal deficit condition back in the spotlight, Wong warned.

Source: CNBC

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James Whitman

Central Bank

Economic

U.S. Federal Reserve officials at their last meeting acknowledged they could face "difficult tradeoffs" in coming months in the form of rising inflation alongside rising unemployment, an outlook buttressed by concerns about financial market volatility and Fed staff warnings of increasing recession risk, according to minutes of the May 6-7 session.

The foreboding outlook has likely shifted since then following President Donald Trump's decision just a week after the meeting to postpone the severe import tariffs, including a 145% levy on goods from China, that had forced up bond yields, driven down stock prices, and led to widening predictions of a U.S. economic downturn.

But the minutes released on Wednesday still showed Fed policymakers and staff engaged in a consequential discussion of the likely fallout from Trump administration policies that remain in flux - with even the highest tariffs on hold but not yet withdrawn altogether.

Officials at the meeting noted that volatility in bond markets in the weeks before "warranted monitoring" as a possible risk to financial stability, and noted that a change in the U.S. dollar's safe-haven status, along with rising Treasury bond yields, "could have long-lasting implications for the economy."

Fed officials continue to cite the possibility of inflation and unemployment rising in tandem as a risk that would leave them forced to decide whether to prioritize fighting inflation with tighter monetary policy or cutting interest rates to support growth and employment.

"Almost all participants commented on the risk that inflation could prove to be more persistent than expected," as the economy adapted to higher import taxes proposed by the Trump administration.

"Participants noted that the (Federal Open Market) Committee might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken," the minutes said. "Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer."

RISKS TO BOTH SIDES

The prospect of rising unemployment and higher inflation was outlined in staff briefings that projected a "markedly" higher inflation rate this year due to the impact of tariffs and a job market "expected to weaken substantially" with the unemployment rate rising above estimates of full employment by the end of this year and remaining there for two years.

The unemployment rate was 4.2% as of April; Fed officials consider 4.6% to represent the level sustainable in the long run with inflation steady at the central bank's 2% target.

The delay in the most aggressive tariffs to be imposed on China and other nations caused many analysts to lower their own estimated recession risks, which Fed staff as of early May had considered "almost as likely" as their baseline outlook of slowing but continued growth.

In theory those stiff tariffs are only on hold until July pending negotiations over final tax rates, with Fed officials and business executives left in the dark about key aspects of the upcoming economic landscape.

The uncertainty still felt today was also the watchword at the meeting in early May, when the Fed decided to hold the benchmark policy rate steady in the 4.25% to 4.5% range. In a press conference after the meeting, Fed Chair Jerome Powell indicated the central bank was effectively sidelined until the Trump administration finalizes its tariff plans and the impact on the economy becomes clearer, a view reiterated by Powell and other Fed policymakers in the weeks since.

The Fed next meets on June 17-18, when the central bank will release new projections from policymakers about their outlook for inflation, employment and economic growth in coming months and years, and the projected interest rate they feel would be appropriate.

At their March meeting the median projection among policymakers was for two quarter-point interest rate cuts by the end of 2025.

Source: Reuters

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Manuel

Political

Cryptocurrency

The UK’s Financial Conduct Authority (FCA) in collaboration with the Bank of England will be creating and proposing detailed regulations for stablecoins and crypto custody services.

The attempt to bring clarity and security to the cryptocurrency industry has reached a new milestone with both the UK’s FCA and the Bank of England collaborating to propose a regulatory system.

UK FCA and Bank of England present crypto regulation

In an effort to bring greater clarity and security to the crypto industry, the UK’s Financial Conduct Authority (FCA) has published detailed proposals that outline the regulations of stablecoins and crypto custody services.

The FCA is partnering closely with the Bank of England to ensure consistent oversight and stability in the United Kingdom.

Stablecoins are often considered to be a bridge between traditional finance and blockchain technology due to their ability to facilitate efficient and low-cost transactions.

Under the proposals, issuers of regulated stablecoins must use robust systems to manage backing assets. They will also be required to provide transparent information about how these assets are held and protected.

“At the FCA, we have long supported innovation that benefits consumers and markets,” David Geale, the Executive Director for Payments and Digital Finance at the FCA said. “At present, crypto is largely unregulated in the UK. We want to strike a balance in support of a sector that enables innovation and is underpinned by market integrity and trust.”

The new regulatory regime is aimed at supporting innovation in the crypto space while also ensuring the integrity of the market, consumer protection, and strength of the system.

To create the proposals, there was extensive engagement with the industry, taking feedback from previous discussion papers and roundtables into account. Before the announcement of the regulatory proposals, HM Treasury drafted legislation that was published in April 2025.

To further encourage innovation, the FCA announced that it will consider adding a specific focus on stablecoins to its innovation services in the coming months, which would create new opportunities for firms developing regulated stablecoin products.

The Bank of England, on the other hand, will oversee the stablecoins that operate at a systemic scale. Sarah Breeden, the Deputy Governor for Financial Stability at the Bank of England, welcomed the FCA’s proposals and emphasized the central bank’s intent to publish a complementary consultation paper later this year.

The paper will address the regulatory treatment of systemic stablecoins, including the possibility of allowing returns on the assets backing them.

“We continue to work closely with the FCA to ensure the integrity of the UK’s stablecoin regime,” Breeden said, “including how firms transition within the regime.”

FCA draft covers crypto custody

Other than offering clarity about stablecoins, the FCA’s consultation paper also mentions rules for crypto asset custody.

Under the proposed regulatory regime, crypto custodians must ensure that customers’ assets are effectively secured and remain accessible at all times. Enforcing this will likely involve creating specific requirements for how assets will be stored, managed, and segregated from firm assets, which would reduce the risk of loss or misuse.

The FCA’s proposals include new expectations for firms that offer either stablecoin issuance or crypto custody that will reduce the likelihood and impact of operational failures. The methods to achieve this may include governance standards, capital requirements, and measures to protect client assets in the event of a firm’s insolvency.

The public has until July 31, 2025, to provide feedback on the proposals.