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The Fed: Can the U.S. avoid recession? The Fed still thinks so, but Wall Street is very skeptical

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Senior Federal Reserve officials cling to the hope they can stamp out high inflation without triggering an economic meltdown, but Wall Street forecasters are increasingly gloomy.

“I think we can bring inflation down relatively quickly while also avoiding a recession,” Charles Evans, president of the Chicago Federal Reserve, told the National Association of Business Economists on Monday.

Business economists are less sure. A survey of NABE members shows they expect the U.S. economy to barely grow in the next year, leaving it on the cusp of recession.

The economy is forecast to expand a measly 0.1% from the fourth quarter of 2022 to the fourth quarter of 2023, according to the latest NABE forecast.

Just five months ago, economists had been predicting 1.8% growth in 2023. And they were estimating 2.9% growth as recently as last February.

A majority of economists are still not predicting outright recession, however. Evans is among them.

Evans contends inflation could decline almost as rapidly as it rose.

For one thing, he said, global shortages of key supplies such as computer chips that drove the spike inflation early on are rapidly easing and providing one source of relief.

“Ports are less congested, freight costs are falling, and supplier delivery times are improving,” he said.

The Fed’s aggressive strategy to raise U.S. interest rates should also slow the economy enough to allow businesses to catch up with demand, he said. It would also reduce the demand for workers and ease a labor shortage that’s driving up wages and adding to inflationary pressures.

Evans acknowledged his views might sound “rather optimistic,” but he argued the old economic rules might not apply now because of the pandemic.

“Obviously, the pandemic-era shocks have wreaked havoc on the usual relationships between economic variables and on the models we use to explain them. This has been particularly true in the labor market,” he said.

“Here, though, the unfamiliar patterns point to reasons why our inflation forecast may be achieved with only moderate increases in unemployment,” he added. The Fed predicts the jobless rate will climb to a still-low 4.4% by next year from the current level of 3.5%.

In any case, Evans said, what’s important is that the Fed raise rates high enough and keep them them high until inflation falls back close to the central bank’s 2% long-run target.

The rate of inflation based on the consumer price index has climbed 8.3% in the 12 months ended in August. The Fed’s preferred inflation gauge, known as the PCE index, has risen 6.2% in the same span.

Evans wants to push the Fed’s benchmark interest rate to above 4.5% by early next year and then reassess then economy. The so-called fed funds rate stood near zero just eight months ago.

The rate affects the rest of the economy by influencing how much consumers and businesses pay to borrow money. Take the housing market, the most extreme example. Mortgage rates have jumped to almost 7% from less than 3% one year ago.

Evans said it’s critical for the Fed to show the public it’s committed to eliminating high inflation lest people come to expect steadily rising prices in the future.

“Reducing it will likely require a sustained period of restrictive monetary policy, below-trend growth, and some softening of labor market conditions,” he said. “But this is necessary to restore inflation to our 2 percent target.”

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