Nobody Is Going to Save Us From a Recession

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Nobody Is Going to Save Us From a Recession

Nobody Is Going to Save Us From a Recession
There is a growing sense that the United States is headed for a recession. The bad mood in the economy is manifesting itself in everything from falling stock prices to gloomy forecasts from pundits to business sections where financial columnists have already begun offering helpful tips on how to weather an "inevitable" downturn.

Maybe the situation isn't so hopeless after all. But as of this week, one thing seems pretty clear: If the economy does indeed tip over a cliff, no one in Washington will intervene to stop the fall.

The economic challenges facing the U.S. are clear. Inflation remains in full swing - the consumer price index rose 8.6 percent last year, the fastest pace since 1981 - and the Federal Reserve is trying to control it by aggressively raising interest rates to cool consumer demand. Many are concerned that the central bank's efforts could plunge the country into a downturn. There are already some signs of a slowdown, such as a slight decline in retail sales and a cooling of the housing market.

But there are also very simple reasons to be optimistic. Namely: the economy is not really in the ditch yet. It is showing signs of fatigue, but consumer spending and job growth are still strong. If inflation starts to moderate and the Fed can hit the brakes, we could avoid a contraction.

But let's assume that the economy does slide. In that case, it is not likely that those in power will do much about it.

For starters, the Biden administration simply doesn't have many tools at its disposal to stop a downturn on its own. To do anything significant, it would need Congress, which is unlikely to be in the mood to do much if Republicans win control in the November midterm elections. Even if Democrats miraculously stay in power and the current legislative momentum remains about the same, it's not clear that Senator Joe Manchin would be amenable to a stimulus package, given his oft-expressed concerns about inflation and the deficit.

That leaves the Fed, whose efforts to curb inflation are at the heart of everyone's recession fears. For much of this year, central bank officials were confident they could achieve a so-called soft landing, that is, bring consumer prices under control without causing a major slowdown in the economy. But recently, their tone has changed.

The Fed doesn't want to cause a recession, but it will probably tolerate one if that's what it takes to get inflation under control. Until the consumer price index slows, we shouldn't expect the Fed to raise rates again, even if the economy slows. Fed Governor Chris Waller summed up the new stance in a speech in May.

This is more or less a return to the old form for the Fed. In 1979, then-Chairman Paul Volcker told Congress that the average American's standard of living would have to fall to combat the high inflation of the time. He and his colleagues then created a severe double-dip recession that pushed unemployment above 10 percent but appeared to keep prices in check. Powell and Co, who were much more willing than previous Fed chairmen to tolerate some inflation in order to promote a strong labor market, don't quite go to Volcker-like extremes. But they are setting more or less the same priorities: inflation first, everything else second.

Possibly, this is the right decision. After all, Americans are pretty angry about inflation and apparently want someone to do something about it. (However, monetary policy can't do much about gasoline prices, which seem to be what voters are most angry about.) Moreover, the Fed's big fear right now is that if the current rate of inflation continues, people and businesses will expect prices to continue to rise and a self-fulfilling cycle will be set in motion. It is trying to prevent this from happening by showing that it is willing to take drastic action now, even if it comes at an economic cost. By showing resolve now, it is hoped that officials will have to take less tight measures in the future and perhaps spare the economy some pain.
Was this article helpful? Yes -0 No -01 Posted by: 👨 Joseph N. Lewis
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