New York CNN –
In the last few years, all the smart money went into a recession in the US that occurred sometime before the next presidential election. To be clear, this could still happen. In the world of business, nothing is certain. However, it is extremely unlikely that the American economy will suffer a setback any time soon.
Around this time last year, some of the most closely watched economists were predicting a recession. During the year they revised their forecast and instead predicted a mild recession. But like the Federal Reserve, many began to abandon the recession narrative altogether.
Which begs the question: How on earth did America avoid a recession? The Fed has done everything in its power over the past 20 months to slow the American economy and combat runaway inflation, knowing full well that it could inadvertently cause millions of Americans to lose their jobs.
During this period, it increased its key interest rate target eleven times – at a historic pace. The Fed hadn't raised interest rates so much or so quickly since America's last inflation crisis 40 years ago — and in 1980, the Fed raised interest rates so much that it plunged the economy into its deepest recession since the Great Depression.
The Fed also sold trillions of dollars' worth of bonds and other debt it had purchased over the years, reducing demand for Treasuries and driving up yields. Consumer loans, mortgages, credit cards and other borrowing rates tied to those returns have skyrocketed, devastating the American real estate market, which is on track for its worst year since 1993.
But nearly two years into the Fed's campaign to slow the American economy, it may have accomplished the impossible: curbing inflation without plunging us into a recession.
To be fair, virtually no one is a fan of the American economy right now, which is driving down President Joe Biden's popularity ratings. But jobs are booming, consumers are still spending money, and the situation could be much worse. The American economy grew at an electric annual rate of 5.2% last quarter, an impressive performance considering the pressure the Fed was putting on it.
If the Fed avoided a recession, it would have achieved its remarkable goal with a combination of luck and ingenuity.
Fed Chairman Jerome Powell admits he did not expect the economy to perform so well given the historic campaign of interest rate hikes.
Resilient was 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 was so resilient, Powell & Co. might have been a bit unlucky.
The job market remains incredibly robust, in part because of the ongoing changes brought about by the pandemic. The so-called “Great Resignation” during and after the Covid lockdown meant that companies desperately needed employees to collectively say: “Take this job and push through.” This meant that companies had to increase their wages in order to to attract new workers, and mass layoffs have been rare in recent years.
The booming American job market helped the Fed continue to raise interest rates without weakening the economy.
Some other luck played a role: Since 2021, Americans have shopped until they drop, helped first by government stimulus checks at the start of the Biden administration, then by so-called revenge trips as Covid restrictions were eased. The Fed even called Taylor Swift's Eras Tour over the summer an unexpected boost to the economy. Although Christmas shopping was somewhat subdued compared to previous years, it remained reasonably strong.
Even some bad news turned out to be good for the Fed's efforts to prevent a recession: The regional banking crisis in March hurt the economy just enough for the Fed to slow down its historic rate hikes. This saved businesses and consumers money that they would otherwise have paid on their mortgages or credit card bills.
But the Fed also deserves a lot of credit.
“Most people don't think about what the alternative could have been,” Lael Brainard, a former Fed vice chair and current director of President Biden's National Economic Council, told CNN on Friday. “But obviously the forecasters have been very clear about what they expected a year ago and the likelihood that there would be large job losses and a recession in some cases to bring inflation up to where it is now was almost 100% today.”
Not quite 100%, though: Even as his boss, JPMorgan Chase CEO Jamie Dimon, predicted storm clouds for the US economy, Bruce Kasman, the bank's global head of economic research, was one of the few to push back against recession forecasts for the latter Year.
Kasman rightly took a victory lap at a conference hosted by JPMorgan last month. “The reason we were fending off a recession this time last year was not because [there] “There was no significant monetary policy resistance,” Kasman said. “If you look at what is happening elsewhere, the easing of commodity price shocks has brought big benefits. They had a big positive impact on U.S. fiscal policy that I don’t think people really appreciated.”
“When you put these things together, you just don't get the sense that the economy is very vulnerable,” Kasman added.
Despite criticism from both sides, the independent Fed stayed the course and promised to do whatever it takes to curb runaway inflation – a feat it has largely succeeded in doing.
Although prices in many cases are still significantly higher than they were two years ago, the Fed cut inflation to an annual rate of 3.1% from its peak of 9.1% more than a year ago. That's still above the 2% target, but the Fed expects to gradually reach that level by 2026.
Had the Fed changed course, price increases likely would have continued unchecked. But if interest rates were raised too high, the Fed could have done significantly more damage to the economy.
Here's what usually happens: The Fed achieved a so-called soft landing – where it raises interest rates but avoids a recession (well, depending on how you count; some research says the Fed actually pulled it off) – once in the last 60 years has). more often).
But the job is hardly done, Brainard noted.
“We have a lot to do,” she said. “There are certain areas where Americans continue to see significant affordability challenges.”
Powell recently told a group of college students that if there was “a really good inflation report,” he would be a big party. One can only imagine the hangover Powell will have if these reports keep coming and there is no recession.