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The Federal Reserve has raised interest rates to the highest level in more than 20 years in an effort to curb inflation. Many economists were convinced that the central bank's aggressive fight would push the economy into recession, but that didn't work.
For the past few years, all the smart money has been directed toward a U.S. recession that will occur at some point before the next presidential election. Let me be clear: it could absolutely happen in the future. In the world of economics, nothing is certain. However, it seems highly unlikely that the U.S. economy will turn around anytime soon.
This time last year, some of the most-watched economists were predicting a recession all at once. As the year progressed, they revised their forecasts and were instead hit by a mild recession. But like the Fed, many have begun to abandon the recession narrative altogether.
This begs the question: How on earth did America avoid recession? The Federal Reserve has spent the past 20 months doing everything in its power to slow the U.S. economy to combat runaway inflation, fully aware that runaway inflation could inadvertently put millions of Americans out of work. It's here.
During that period, it raised its key interest rate target 11 times, and at a historic pace. Not since America's last inflation crisis 40 years ago has the Fed raised interest rates this big and so quickly. Then, in 1980, the Fed raised interest rates so high that they plunged the economy into the deepest recession since the Great Depression.
The Fed also sold trillions of dollars of bonds and other bonds it had bought over the years, drying up demand for U.S. Treasuries and pushing up yields. Interest rates on consumer loans, mortgages, credit cards and other yield-linked lending skyrocketed, devastating the U.S. housing market, which is at its worst pace since 1993.
But nearly two years after the Fed tried to slow the U.S. economy, it may have accomplished the impossible: curbing inflation without sliding into recession.
To be fair, virtually no one supports the American economy at a time when President Joe Biden's favorability rating is declining.But employment is strong and consumers are still spending.
, And the situation could get even worse. The U.S. economy grew 5.2% in electricity terms last quarter, a surprising achievement given the stress the Fed has placed on the economy.
If the Fed had avoided a recession, a combination of luck and ingenuity would have achieved that remarkable goal.
Fed Chairman Jerome Powell acknowledged that he did not expect the economy to hold up this well against the backdrop of a historic interest rate hike campaign.
Resilience is the buzzword of the year. Powell and his colleagues have used the term to describe banking systems, consumers, labor markets, and more.
As for why everything and everyone is so resilient, Powell & Co. may have been blessed with a bit of dumb luck.
The job market remains incredibly strong, in part because of the lingering changes caused by the pandemic. The so-called “Great Retirement” during and after the coronavirus lockdown meant that companies desperately needed employees to collectively say, “Take this job and give it your all.” That means companies have had to raise wages to attract new workers, and mass layoffs have remained rare over the past few years.
A booming U.S. job market helped provide cover for the Fed to continue raising interest rates without dampening the economy.
Other good fortunes are also factored in. Since 2021, Americans have been shopping to the drop, first helped by federal stimulus at the start of the Biden administration, then by so-called revenge travel as coronavirus restrictions eased. The Fed even cited Taylor Swift's summer tour as an unexpected boost to the economy. Additionally, although the year-end sales season has slowed down a bit compared to previous years, it continues to be relatively strong.
Even some bad news was good news for the Fed's efforts to avoid a recession. The local bank crisis in March hit the economy hard enough to cause the then-Fed to slightly delay its historic interest rate hike. This allowed businesses and consumers to save some of the funds they would have had to pay for mortgages and credit card bills.
But the Fed also deserves a lot of credit.
“Most people don't think about what the alternative was,” Lael Brainard, a former Fed vice chair and current director of President Biden's National Economic Council, told CNN on Friday. “But clearly forecasters have been very clear about what they expected a year ago, and in some cases it would take significant job losses and a recession for inflation to reach current levels. There was a very close to 100% chance of it happening today. ”
However, it is not necessarily 100%. Despite his boss, JPMorgan Chase CEO Jamie Dimon, predicting storm clouds for the U.S. economy, Bruce Kassman, the bank's global head of economic research, said the policy was He was one of the few people who rebelled. Recession predictions made last year.
Unsurprisingly, Kassman took a victory lap at a conference hosted by JPMorgan last month. “The reason we resisted recession this time last year was not because: [there] It did not act as a drag on important monetary policy,” Kasman said. “If you look at what's happening in other regions, we find that there are big positives coming from the mitigation of commodity price shocks. You got a big positive from US fiscal policy, but people I don't think they appreciated it very much.”
“When you put all these things together, it didn't feel like the economy was that vulnerable,” Kasman added.
Despite criticism from both sides, an independent Fed stuck its course and promised to do whatever it took to stop runaway inflation, a feat it nearly accomplished.
In many cases, prices remain significantly higher than they were two years ago, but the Fed has lowered inflation to an annual rate of 3.1% from a peak of 9.1% a year ago. This is still above the 2% target rate, but the Fed expects to gradually reach it by 2026.
If the Fed had changed course, price increases likely would have continued to be more prevalent. But the Fed could have caused even more damage to the economy by raising rates too high.
That's what usually happens: The Fed has achieved what's called a soft landing (raising interest rates but avoiding a recession) once in the last 60 years (well, depending on how you count, some studies suggest the Fed actually did it) more often).
But the work is hardly done, Brainard noted.
“We have a lot of work to do,” she said. “There are certain areas that Americans continue to find affordability very difficult.”
Chairman Powell recently told a group of college students that for him, the big party is when a “really good inflation report” comes out. If these reports continue and a recession does not occur, one can only imagine that Mr. Powell will have a hangover.