If the US is really in a recession, this is the impact that Indonesia must be aware of

Jakarta, CNBC IndonesiaThe “ghost” of recession is likely to return to haunt the United States (US) in the near future. High inflation that hit Uncle Sam’s country made the US central bank (The Fed) more aggressive in raising interest rates.

The Fed has raised interest rates by 75 basis points to 1.5% – 1.75%. The increase was the largest since 1994. An aggressive interest rate hike will almost certainly occur as inflation in the US continues to climb.

“We’re attacking inflation and are going to do everything we can to bring it back to normal, for us it’s at 2%. We’re going to do whatever it takes to make it happen,” Atlanta Fed President Raphael Bostic said in a statement. Reuters.

Inflation based on the consumer price index (CPI) in the US currently stands at 8.6% year-on-year (yoy), the highest in 41 years.

Based on the Fed Dot Plot released at the end of each quarter, the majority of members of the Fed’s monetary policy-making committee (FOMC) see interest rates at the end of the year at 3.4% or in the range of 3.25% – 3.5%.

This means that at the end of the year the interest rate will be higher than the level considered neutral 2.5% – 2.75%. A neutral interest rate means that it does not stimulate the economy, nor does it trigger an economic slowdown.

The further interest rates are above neutral, the risk of an economic slowdown leading to a recession increases.

Moreover, the signal that the United States will return to a recession has emerged from the inversion of US bond yields (Treasury).

The inversion occurred after the 2-year Treasury yield was higher than the 10-year tenor, although it only lasted for a moment. Under normal conditions, the yield of a longer tenor will be higher, when an inversion occurs the position is reversed.

Previously, an inversion also occurred in April, and became a strong signal of a recession in the United States.

Based on research from the San Francisco Fed released in 2018 shows that since 1955 when a yield inversion occurred, it would be followed by a recession within 6 to 24 months afterward. During this period, the Treasury yield inversion only once did not trigger a recession (false signal).

After the release of the research, yield inversion occurred again in the United States in 2019, which was followed by a recession, although it was also affected by the pandemic of the disease caused by the corona virus (Covid-19).

Meanwhile, investment bank JP Morgan said the probability of the United States experiencing a recession is currently at 85 percent, based on price movements in the stock market.

The S&P 500 index so far this year has fallen about 23%. According to JP Morgan, in the last 11 recessions, the average S&P 500 index has slumped by 26%.

What impact will it have on Indonesia?

Minister of Finance Sri Mulyani Indrawati said the effect would gradually be felt by Indonesia. Initially, the impact will be felt through the financial market, including the emergence of capital outflows that put pressure on the rupiah and stock exchange rates.

Furthermore, the impact will continue to the real sector, especially exports. It is known that the US is Indonesia’s main trading partner. So that when the economy slows down, the demand for Uncle Sam’s country will decrease.

“Exports that have so far reached a surplus should not be considered as continuing to occur,” he explained.

Local governments are expected to prepare carefully. If not, then the risk can spread to the community hard.

“Regions that expect DBH usually think about getting additional funds when you calculate the prices have changed again, which makes this challenge spread to us in the form of rising or falling prices, causing inflation and impacting people’s purchasing power,” said Sri Mulyani.

[Gambas:Video CNBC]

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