In recent months, there has been a significant amount of economic uncertainty, driven primarily by inflation, which reached a 40-year high of 9.1% in June, before easing to 8.5% in July. The Federal Reserve, in an effort to combat inflation that is having an adverse impact on the economy, has been aggressively raising interest rates.

Aggressive Interest Rate Hikes Continue

The Fed implemented 75-basis-point interest rate hikes in both June and July. The last time the Fed raised rates 75 basis points in one meeting was 1994. These two increases were in addition to 25- and 50-basis-point increases in March and May, respectively. The more aggressive hikes followed the release of the May consumer price index (CPI), which showed that prices rose 8.6% over the last 12 months—the largest increase in four decades—putting pressure on the Fed to take a more aggressive stance.

It is our view, and the view of the markets, that the Fed will need to continue raising rates in the coming months to bring down inflation, which would put the Fed Funds target rate above 3% by the end of the year. While the interest rate increases we have seen so far have impacted both equity and fixed income markets this year, and have started to be felt in the real economy, it remains to be seen whether the Fed's efforts to combat inflation will succeed without tipping the economy into a recession.

Inflation a Global Issue

In the U.S. and across the globe, inflation is expected to persist at least throughout the year. Other central banks have also been raising interest rates in response. For example, the European Central Bank raised its rates by 50 basis points in July, its first hike in 11 years, and the Bank of England raised interest rates by 50 basis points earlier this month and took the unusual step of projecting a recession. It is likely that both will continue to raise interest rates throughout the remainder of the year, similar to the Fed, especially since Europe is facing higher energy costs than the U.S., given Russian restrictions on the export of natural gas.

While unemployment remains at very low levels, both here and abroad, the aggressive increases in rates in most major economies have led both the International Monetary Fund and the World Bank to lower their global growth forecasts for 2022.

Is the U.S. Already in a Recession?

The U.S. economy declined 0.9% between April and June, according to an advance estimate from the Bureau of Economic Analysis, after shrinking at an annual rate of 1.6% in the first quarter of this year. Although two consecutive quarters of negative Gross Domestic Product (GDP) is the commonly used definition of a recession, the National Bureau of Economic Research, which is officially responsible for announcing a recession, has not declared a recession, as they wait to analyze additional economic data in order to gauge how significant and widespread the decline in economic activity has been. For example, the White House Council of Economic Advisers has pointed to other key indicators, such as the continued strength of consumer spending and job growth in the first half of the year, as positive signs that the country is not in a recession.

Although the declaration of a recession always comes after the fact, it is our belief that financial markets have already priced in an economic slowdown, although they most likely have not priced in a more severe recession scenario.

Uncertain Outlook

Regardless of whether the country is currently in, or heading into, a recession, the short- to intermediate-term economic outlook is likely to remain murky until the path of inflation and interest rates is more clear. This could mean that stock and bond markets remain volatile over the near term, and investors should continue to monitor their portfolios to ensure that they align with their risk tolerance and investment timeline.

Joseph Gaffoglio is the President of Mutual of America Capital Management LLC.

The views expressed in this article are subject to change at any time based on market and other conditions and should not be construed as a recommendation. This article contains forward-looking statements, which speak only as of the date they were made and involve risks and uncertainties that could cause actual results to differ materially from those expressed herein. Readers are cautioned not to rely on our forward-looking statements. This content is for informational purposes only and not intended to be investment advice.

Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company.