New York
CNN
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Over the past couple of years, all the smart money has been focused on the economic recession occurring in the United States sometime before the next presidential election. To be clear: this could definitely still happen. In the world of economics, nothing is certain. But it seems unlikely that the US economy will head in the opposite direction any time soon.
Around this time last year, some closely watched economists were predicting a recession. As the year went on, they revised their forecasts, instead anticipating a moderate recession. But like the Fed, many are starting to abandon the recession narrative altogether.
Which raises the question: How did America manage to avoid a recession? The Federal Reserve has spent the past 20 months doing everything it can to slow the US economy in order to combat runaway inflation while fully aware of the fact that it may inadvertently cause millions of Americans to lose their jobs.
It raised its key interest rate target 11 times during that period – a historic pace. The Fed has not raised interest rates so much and so quickly since America’s last inflation crisis 40 years ago — and in 1980, the Fed raised rates so high that it plunged the economy into the deepest recession since the Great Depression.
The Fed also sold trillions of dollars of bonds and other debt it had bought over the years, reducing demand for Treasuries, pushing yields higher. Consumer loans, mortgages, credit cards and other lending rates tied to those yields have soared, devastating the U.S. housing market, which is on pace for its worst year since 1993.
However, nearly two years into the Fed’s campaign to slow the US economy, it may have done the impossible: reining in inflation without pushing us into recession.
To be fair, practically no one is a fan of the US economy right now, which has dragged down President Joe Biden’s approval ratings. But jobs are booming, and consumers are still spending, The situation could be much worse. The US economy grew at an electric annual rate of 5.2% last quarter, an astonishing feat considering the pressures the Federal Reserve has put on it.
If the Fed could avoid a recession, its remarkable goal would have been achieved through a combination of luck and creativity.
Fed Chairman Jerome Powell admits that he did not expect the economy to maintain such a good level on the back of a historic campaign to raise interest rates.
Resilience has been the buzzword of the year. Powell and his colleagues have used it to describe the banking system, the consumer, the labor market, and more.
As for why everything and everyone is so resilient, maybe Powell and company just had a little dumb luck.
The job market remains incredibly strong, in part due to ongoing changes due to the pandemic. The so-called Great Resignation during and after the Covid lockdown meant that companies were desperate for employees who collectively said “take this job and pay it”. This means that companies have had to raise wages to attract new workers, and mass layoffs have remained rare over the past few years.
America’s booming job market helped give the Fed the cover to continue raising interest rates without overwhelming the economy.
Some other luck has factored in: Since 2021, Americans have been shopping until they stop shopping, helped at first by federal stimulus checks at the start of the Biden administration, and then by so-called retaliatory travel as Covid restrictions ease. The Fed even cited Taylor Swift’s Eras Tour over the summer as an unexpected boost to the economy. Although holiday shopping was somewhat weak compared to previous years, it remained reasonably strong.
And even some bad news turned out to be beneficial to the Fed’s efforts to avoid a recession: The regional banking crisis in March damaged the economy enough that the then-Fed was able to slow its historic interest rate increases slightly. This saved businesses and consumers some money they would have otherwise paid on their mortgages or credit card bills.
But the Fed deserves a lot of credit, too.
“Most people aren’t thinking about what the alternative could be,” Lael Brainard, a former Fed vice chair and current director of President Biden’s National Economic Council, told CNN on Friday. “But forecasters clearly laid out very clearly what they predicted a year ago, and there was a 100% probability, in some cases, that there would be significant job losses and a recession in order to get inflation to where it is today.”
But not 100%: Even as his boss, JPMorgan Chase CEO Jamie Dimon, was predicting storms ahead for the US economy, Bruce Kasman, the bank’s global head of economic research, was one of the few to push back. Recession forecasts were brewing last year.
Indeed, Kasman scored a victory lap at a conference hosted by JPMorgan last month. “The reason we came out of last year’s recession at this time was not because of that [there] “It was not a significant slowdown in monetary policy,” Kasman said. “If you look at what’s been happening elsewhere, you’ve had this big positive from unwinding commodity price shocks. You’ve had a lot of positive from US fiscal policy, which I think people haven’t really appreciated.”
“When you put those things together, it didn’t feel like the economy was very weak,” Kasman added.
Despite criticism from both parties, the independent Fed stayed the course, pledging to do everything it could to thwart runaway inflation — a feat it largely achieved.
Although prices in many cases are still much higher than they were two years ago, the Fed has succeeded in bringing inflation down to an annual rate of 3.1%, after reaching its peak of 9.1% more than a year ago. This is still above the target rate of 2%, but the Fed expects it will gradually reach that level by 2026.
If the Fed changes course, price rises will likely continue to spread. But raising interest rates too high, and the Fed could have done greater damage to the economy.
Here’s what usually happens: The Fed has achieved what’s called a soft landing — where it raises interest rates but avoids a recession — once in the past 60 years (well, depending on how you count; Some research (The Fed has already done this too often, he says.)
Brainard noted that the mission is not yet complete.
“We have a lot of work to do,” she said. “There are certain areas where Americans still see great difficulty with affordability.”
Powell recently told a group of college students that the big celebration for him is when there’s a “really good inflation report.” One can only imagine how influential Powell would be if these reports continued to emerge and a recession did not occur.
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