There’s a growing sense that the United States is on course for a recession. The bad economic vibes are manifesting in everything from plunging stock prices to dour professional forecasts to business sections where financial advice columnists have already started doling out helpful tips on how to ride out an “inevitable” downturn.
Things might not actually be that hopeless. But as of this week, one thing seems pretty clear: If the economy does tip over a cliff, nobody in Washington is going to swoop in to stop its fall.
The economic challenges facing the U.S. are all pretty plain to see. Inflation is still on a tear—the consumer price index is up 8.6 percent over the last year, rising at its fastest pace since 1981—and the Federal Reserve is scrambling to control it by aggressively hiking interest rates in order to cool down consumer demand. Many are worried that the central bank’s effort will end up pushing the country into a slump. There are already some signs of a slowdown, such as a slight fall in retail sales and a cooling housing market.
Making matters worse, Russia’s war in Ukraine has sent the price of gasoline up past $5 a gallon. That’s been an economic double whammy, hitting households in the pocketbook while putting pressure on the Fed to act more aggressively, since it’s a major part of the inflation we’re seeing.
Together, these factors are setting off alarms on Wall Street and beyond. Bloomberg Economics, for instance, is now predicting a 3-in-4 chance of recession by 2024.
There’s also a straightforward case for optimism. Namely: The economy isn’t actually in a ditch yet. While it’s showing signs of fatigue, consumer spending and job growth are still strong. If inflation begins to resolve, and the Fed can step off the brakes, then we might avoid a contraction.
But let’s say the economy really does slide. In that case, don’t expect anyone in power to do much about it.
For starters, the Biden administration simply doesn’t have a lot of tools it can use to arrest a downturn on its own. To do anything significant, it would need Congress, which likely won’t be in the mood to do much if Republicans win control in November’s midterms. Even if Democrats do by some miracle hold on to power and the current legislative dynamic remains about the same, it’s not clear that Sen. Joe Manchin would be up for any kind of stimulus package, given his often-stated concerns about inflation and the deficit.
And that leaves the Fed, whose efforts to squelch inflation are at the center of everyone’s recession fears. For much of this year, the central bank’s leaders confidently predicted that they could achieve a so-called soft landing—bringing consumer prices under control without causing a major slowdown in the economy. But lately, their tone has changed.
On Wednesday, the central bank raised its key interest rate by 0.75 percentage points, its biggest single hike since 1994. In their economic projections accompanying the decision, members of the rate-setting committee lowered their forecasts for growth and predicted a moderate rise in unemployment over the next couple of years. At his press conference following the announcement, Fed Chair Jerome Powell told reporters that he and his colleagues were “not trying to induce a recession now” in order to bring down inflation, but that the path to getting prices under control without one had “become much more challenging due to factors that are not under our control,” such as the war in Ukraine and supply chain issues. He also stressed that the Fed is only projecting that unemployment will rise to 4.1 percent by 2024, low by historic standards.
At the same time, Powell made clear that the Fed’s top goal was to defeat inflation. In his opening statement, he gravely explained that the central bank was “strongly committed” to bringing inflation back down to its 2 percent target rate. Later, he said that “the worst mistake we could make would be to fail,” which is “not an option.”
“You know, we have to restore price stability,” Powell added. “We really do, because everything—it’s the bedrock of the economy. If you don’t have price stability, the economy is really not going to work the way it’s supposed to. It won’t work for people.”
Though Powell didn’t say it word for word, it wasn’t hard to read the chair’s basic message between the lines: The Fed isn’t aiming to create a recession, but it will probably tolerate one if that’s what it takes to get inflation in check. Unless the consumer price index slows its roll, we certainly shouldn’t expect it to back off on rate hikes even if the economy starts to look soft. Fed Governor Chris Waller summed up the new attitude during a speech in May: “I cannot emphasize enough that my FOMC colleagues and I are united in our commitment to do what it takes to bring inflation down and achieve the Fed’s 2 percent target.” (In central banking, the words “do what it takes” are typically code for “seriously, we really are pulling out all the stops here, even if it’s unpopular.”)
This is more or less a return to old form for the Fed. In 1979, then-Chair Paul Volcker famously told Congress that in order to slay that era’s high inflation, “the standard of living of the average American has to decline.” He and his colleagues then engineered a severe double-dip recession that sent unemployment north of 10 percent, but seemed to get prices in line. Powell and co., who’ve been much more willing than past Fed boards to tolerate some inflation in order to foster a strong job market, aren’t quite embracing Volcker-esque extremes. But they are expressing more or less the same priorities: inflation first, everything else second.
It’s possible that’s the right decision. Americans are, after all, pretty furious about inflation, and seemingly would like somebody to do something about it. (Though, that being said, monetary policy can’t do much about gas prices, which seem to be the main frustration point for voters.) Moreover, Fed’s great fear at the moment is that if inflation continues at its current rate, people and businesses will start to expect prices to keep rising in the future, and a self-fulfilling cycle will take hold. It’s attempting to stop that from happening by showing it’s willing to take dramatic action now, even if it comes at an economic cost. By showing determination now, the hope is that officials will have to do less tightening in the future, and maybe spare the economy some pain.
But for now, everyone should realize that if unemployment is in peril of shooting up, nobody’s riding to the rescue.
