Many economists, including those within the Federal Reserve, are increasingly confident that a US recession will be avoided. However, this optimism comes with a caveat: it may take until 2024 for a clear confirmation of this positive economic outlook.
According to Fed Chair Jerome Powell, he anticipates that the central bank will skillfully guide the US economy to achieve growth while also bringing inflation rates back down to the desired 2% target. However, he acknowledges that this endeavor will present challenges along the way.
Failing to take decisive action against rising price pressures could result in a resurgence of inflation, necessitating more drastic measures. Additionally, there’s a concern that the delayed impacts of the strongest tightening in forty years could potentially lead to a US recession.
Uncertainty Regarding US Recession
Jonathan Millar, a senior economist at Barclays Capital Inc., regretfully expects clarity after two quarters. Recent inflation drop gives the Fed temporary relief, noted Millar.
The Fed seems more proactive than markets in recognizing uncertain smooth economic transitions. Economic clarity may emerge in two quarters, despite current ambiguity. Millar noted that the Federal Reserve acknowledges uncertainty in achieving a smooth economic transition.
The business cycle committee of the National Bureau of Economic Research, which officially determines US economic downturns, defines a recession as a notable drop in economic activity affecting the entire economy for an extended period, surpassing a few months.
It can require up to 21 months to officially announce a US recession due to the committee needing time to analyze potentially conflicting initial reports and revised data.
Most economists lack a formal soft landing definition, viewing it as controlled inflation moderation without recession or labor market harm. A study by former Fed Vice Chair Alan Blinder analyzed 11 tightening episodes (1965-2022). Four showed stable or reduced inflation, resembling successful soft landings. The remaining instances led to challenging outcomes, such as increased inflation or economic deterioration after two years.
Economists’ Analysis Warn About Concerns
Richard Clarida, former vice chair (2018-2022) and current global economic advisor at Pacific Investment Management Co., highlighted balanced risks. He anticipates gaining clear insight into the situation by next spring. Clarida emphasized the potential challenges on both sides of the scenario.
Bloomberg Economists suggest July 2022 could be the peak of the economic cycle, though indicators vary. Concerns arise about downward payroll revisions that might result in negative nonfarm payroll numbers in recent months.
True 2022 figures will only be confirmed next year, while 2023 figures won’t be fully known until 2025. Despite signs, uncertainty remains about the US recession timing and the impact on payroll statistics.
Neil Dutta’s Concern and Policymakers’ Reply
Neil Dutta, head of economics at Renaissance Macro Research, stresses the need for hindsight to determine a soft landing. Dutta anticipates a potential surge in inflation due to rising oil prices and high home costs impacting rents.
Dutta emphasizes the uncertain nature of predicting a soft landing without retrospective insight. Rising oil prices and elevated housing costs could contribute to an “inflationary boom,” Dutta suggests.
Policymakers share Dutta’s concerns, aiming to avoid the 1970s’ error of halting anti-inflation efforts prematurely. In that era, the Fed’s actions led to a resurgence of double-digit price hikes.
Policymakers aim to prevent a repeat of past mistakes in managing inflation, highlighting vigilance in the process.
Fed Aims Longer for 2% Inflation Projection
Fed officials extend their focus to a lengthier span, projecting a 2% inflation target achievement around post-2025. A foreseeable moderate economy with steady prices could become evident in upcoming data by next year.
The Federal Open Market Committee’s projections hint at the possibility of a clear economic outlook in the following years. If forecasts hold, indicators in later data may showcase a stable economy with anticipated inflation outcomes.
“We often lack certainty during cycles, even at transitions,” noted Julia Coronado, president of MacroPolicy Perspectives. She expresses concern over excessive rate hikes and advocates for patience. Achieving a soft landing relies on the Fed’s adherence to patience, according to Coronado.
The committee foresees maintaining elevated interest rates as achieving this result takes time. The committee expects a 4.6% rate by next year’s end, surpassing the long-term average and market projections. Longer-lasting higher interest rates are foreseen as the committee works towards the desired outcome.
Mixed Market Nature Continues
Last month, the Federal Reserve increased rates to a range of 5.25% to 5.5%, the highest in twenty years, and has indicated the possibility of another hike later this year.
Recent economic figures surpass forecasts, with a 3.5% joblessness rate, a historic low. July’s core inflation gauge shows the smallest consecutive rise over two years.
These signs favor a gentle economic transition but don’t eliminate the possibility of renewed overheating. Despite positive indicators, another bout of elevated prices remains conceivable.
“Inaction regarding inflation at this point would undoubtedly result in the most unfavorable scenario,” Powell stated in July.
Indeed, the US encountered back-to-back quarters of economic decline in the initial half of 2022, a scenario resembling recessions in other nations.
As economic data appears ambiguous during transitions and undergoes later adjustments, assessing the Fed’s success in real-time becomes unfeasible. A quarter of contraction amid an extended expansion is not uncommon.