Has America Achieved the Impossible: Dodging a Recession?
Despite concerns of an impending recession before the next election, America's economy has defied expectations With a mix of favorable circumstances and effective policies, the country has managed to steer clear of a downturn, leaving a positive outlook for the future
In the past few years, most experts predicted a US recession before the next presidential election. Although it's still possible, the likelihood of America's economy declining in the near future is low. Last year, influential economists were forecasting a recession, but many have since abandoned that prediction. Like the Federal Reserve, they have shifted away from the recession narrative.
This begs the question: How did America manage to avoid a recession? Over the past 20 months, the Fed has been using all available tools to slow down the American economy in order to address runaway inflation, fully aware that this could potentially lead to millions of Americans losing their jobs. It raised its key interest rate target 11 times at a historically rapid pace, something that had not been done since the last inflation crisis in America 40 years ago. In 1980, the Fed raised rates so high that it caused the economy to plunge into the deepest recession since the Great Depression.
The Fed's action of selling off trillions of dollars of bonds and other debt it had accumulated over the years had a significant impact on the market. This move reduced the demand for Treasuries, leading to an increase in yields. As a result, consumer loans, mortgages, credit cards, and other lending rates tied to those yields experienced a substantial surge, causing severe damage to America's housing market. It is now on course for its worst year since 1993.
Jerome Powell, the Chairman of the US Federal Reserve, addressed the media in Washington, DC. The Federal Reserve has decided to maintain steady interest rates for a third consecutive meeting, indicating an end to its aggressive hiking campaign and a forecasted series of cuts for next year.
Wall Street is caught up in Fed excitement as the rally may continue to gain momentum. Nearly two years into the Fed's efforts to slow the American economy, it seems to have successfully controlled inflation without causing a recession.
The current state of America's economy is not well-liked by most, causing President Joe Biden's favorability ratings to decline. However, despite the downturn, job growth is strong, consumer spending remains steady, and the overall economic situation is not as dire as it could be. Last quarter, America's economy experienced impressive growth, with an annualized rate of 5.2%, a noteworthy achievement given the challenges faced by the Fed. Avoiding a recession would be a remarkable feat for the Fed, achieved through a combination of luck and resourcefulness.
A lot of luck
Fed Chair Jerome Powell admits he didnt expect the economy to hold up this well against the backdrop of the historic rate-hiking campaign.
"Resilient" has been the word of the year, according to Powell and his colleagues, who have used it to characterize the banking system, consumer, labor market, and more. It seems that everything and everyone has been remarkably resilient, and Powell & Co. may have simply been fortunate in this regard.
The job market continues to thrive, partially due to lasting effects from the pandemic. The significant wave of resignations during and after the Covid lockdown resulted in a high demand for workers, compelling companies to increase wages to attract new talent. As a result, mass layoffs have been uncommon in recent years. This strong job market in the Americas also allowed the Fed to continue raising rates without negatively impacting the economy.
Some fortunate circumstances played a role as well: Since 2021, Americans have increased their spending, initially supported by federal stimulus checks during the start of the Biden administration, and later due to a surge in travel as Covid restrictions were lifted. The Federal Reserve even credited Taylor Swift's Eras Tour over the summer for unexpectedly boosting the economy. Despite the holiday shopping season being somewhat subdued compared to previous years, it has stayed relatively strong.
Even some negative developments ended up benefiting the Federal Reserve's efforts to prevent a recession: The regional banking crisis in March had a slight negative impact on the economy, prompting the Fed to slow down its historic rate hikes. This ultimately saved businesses and consumers money that they would have otherwise spent on mortgage or credit card payments.
Good policy
But the Fed deserves a ton of credit, too.
"Many people do not consider the alternative scenario," said Lael Brainard, former Fed vice chair and current director of President Biden's National Economic Council, in a CNN interview on Friday. "However, it was very clear from forecasters a year ago that there would be a high likelihood of major job losses and a recession in order to achieve the current level of inflation."
Not exactly 100%, however: While JPMorgan Chase CEO Jamie Dimon was predicting challenges for the US economy, Bruce Kasman, global head of economic research at the bank, was one of the few to oppose the recession predictions brewing last year.
During a conference hosted by JPMorgan last month, Kasman rightfully celebrated by taking a victory lap. He emphasized that the reason for pushing back against a recession last year was due to the significant monetary policy drag building up. Kasman pointed out the positive impact of unwinding commodity price shocks and US fiscal policy, which he felt people had not fully recognized. "When you put these things together, it just didn't seem like the economy was very vulnerable," Kasman concluded.
Despite facing criticism from all sides, the independent Federal Reserve remained resolute in its commitment to combatting rampant inflation, a goal it has largely achieved. While prices in many sectors are still considerably higher than they were two years ago, the Fed has managed to lower the inflation rate to 3.1% annually, a significant improvement from its peak of 9.1% over a year ago. Although this is still above the target rate of 2%, the Fed anticipates a gradual decrease to reach the target by 2026.
If the Fed had changed its direction, price hikes would likely have gone out of control. However, raising rates too much could have significantly harmed the economy. This is typically what occurs: In the past 60 years, the Fed has achieved a "soft landing" where it raises rates but avoids a recession- at least once, depending on how you count it. Some research indicates that the Fed has actually achieved this more frequently.
The job is hardly done, though, Brainard noted.
"We have a lot of work to do," she said. "There are certain areas where Americans continue to see really challenging affordability."
Powell recently shared with a group of college students that a major celebration for him is receiving "a really positive inflation report." It is unimaginable the aftermath Powell will face if these reports continue and no recession occurs. This report includes contribution from CNN's Matt Egan.
