Weren’t we supposed to have a recession by now? It’s been just over a year since the pandemic economy ground to a halt, when endless cheap borrowing and free-money policies from the government went into reverse in a bid to fend off last year’s surprise of wild inflation. By this point last year, prices had risen 7.9 percent before bounding even higher in June to a 41-year high. It was a spike that came after a decade where most prices didn’t budge much at all, with the pandemic-era Fed returning to the near-zero borrowing-rate policies that kept the economy afloat after the Great Recession. The tightening last year happened faster and for longer than most had anticipated, with Federal Reserve chair Jerome Powell hiking interest rates so high it would put people out of work and keep their paychecks from getting any bigger. Pessimism was the dominant key for anyone who kept track of these things. But here we are, in April 2023, with the unemployment rate actually falling to 3.5 percent and the number of prime-age people in the workforce at levels not seen since the 1990s. It was the slowest pace of job growth in years, but still better than most people thought — as clear a sign as any that the Fed won’t turn back now.
In the background of all this has been a kind of will-he-or-won’t-he drama around Powell. Wall Street has doubted that he will actually stick with his plan to keep rates higher for longer, and that, essentially, he’s going to chicken out when things get bad — which will happen any day now. To some extent, this is a problem of his own creation: Powell admitted to a kind of magical thinking that the COVID vaccine would cure the problems with the economy, which fed into the central bank’s thinking that inflation was a problem that would just go away on its own. Obviously, this was wrong. While inflation was a global problem — with snags in supply chains and corporations feeling license to pad their balance sheets — Powell’s slow-walking also set the tone for the rest of the world in taming the economic problems that wound up on U.S. shores. To an extent, he’s being criticized for not being Paul Volcker or Alan Greenspan, predecessors whose rate hikes in the 1970s and 1990s helped keep the economy from overheating, but they didn’t have to deal with unprecedented pandemics and stimulus to manage.
It’s not like a recession is off the table. The collapse of Silicon Valley Bank showed that the risks lurking in the financial system aren’t really all that well understood, and there may yet be more fallout from its demise. But it’s also true that not only has the worst not yet come to pass, things are fine. Take a look at comments from JPMorgan Chase CEO Jamie Dimon: The collapse of those banks are “another weight on the scale” that could lead to a recession, which isn’t exactly a strong prediction of what the future will look like. And SVB’s customers — largely California tech darlings — don’t usually have the same large-scale workforces as manufacturers, and the well-publicized layoffs in the sector are hardly making a dent in the overall economic picture. Inflation and unemployment are both lower than they were last June. Inflation, which clocked in at a 6 percent annual rate last month, is still high, but much of that is a holdover from historically high energy prices — something the Fed really has no control over. Even egg prices are starting to come down.
All this gives the Fed a mandate to keep on forging ahead. The fear is that, if Powell goes soft, inflation would come back again, maybe worse than it was last summer, giving the central bank even fewer — and more extreme — options, all but guaranteeing a deep and rough downturn. Bond traders raised the odds that another interest-rate hike is coming next month, though one that’s going to be modest compared to the spate of abnormally high three-quarter point hikes. Chances are, it won’t be that bad.
