• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
MENUMENU
MENUMENU
  • Home
  • About
    • Contact Us
    • FlaglerLive Board of Directors
    • Comment Policy
    • Mission Statement
    • Our Values
  • Live Calendar
  • Submit Obituary
  • Submit an Event
  • Support FlaglerLive
  • Advertise on FlaglerLive (386) 503-3808
  • Search Results

FlaglerLive

No Bull, no Fluff, No Smudges

MENUMENU
  • Flagler
    • Flagler County Commission
    • Beverly Beach
    • Economic Development Council
    • Flagler History
    • Mondex/Daytona North
    • The Hammock
    • Tourist Development Council
  • Palm Coast
    • Palm Coast City Council
    • Palm Coast Crime
  • Bunnell
    • Bunnell City Commission
    • Bunnell Crime
  • Flagler Beach
    • Flagler Beach City Commission
    • Flagler Beach Crime
  • Cops/Courts
    • Circuit & County Court
    • Florida Supreme Court
    • Federal Courts
    • Flagler 911
    • Fire House
    • Flagler County Sheriff
    • Flagler Jail Bookings
    • Traffic Accidents
  • Rights & Liberties
    • Fourth Amendment
    • First Amendment
    • Privacy
    • Second Amendment
    • Seventh Amendment
    • Sixth Amendment
    • Sunshine Law
    • Third Amendment
    • Religion & Beliefs
    • Human Rights
    • Immigration
    • Labor Rights
    • 14th Amendment
    • Civil Rights
  • Schools
    • Adult Education
    • Belle Terre Elementary
    • Buddy Taylor Middle
    • Bunnell Elementary
    • Charter Schools
    • Daytona State College
    • Flagler County School Board
    • Flagler Palm Coast High School
    • Higher Education
    • Imagine School
    • Indian Trails Middle
    • Matanzas High School
    • Old Kings Elementary
    • Rymfire Elementary
    • Stetson University
    • Wadsworth Elementary
    • University of Florida/Florida State
  • Economy
    • Jobs & Unemployment
    • Business & Economy
    • Development & Sprawl
    • Leisure & Tourism
    • Local Business
    • Local Media
    • Real Estate & Development
    • Taxes
  • Commentary
    • The Conversation
    • Pierre Tristam
    • Diane Roberts
    • Guest Columns
    • Byblos
    • Editor's Blog
  • Culture
    • African American Cultural Society
    • Arts in Palm Coast & Flagler
    • Books
    • City Repertory Theatre
    • Flagler Auditorium
    • Flagler Playhouse
    • Flagler Youth Orchestra
    • Jacksonville Symphony Orchestra
    • Palm Coast Arts Foundation
    • Special Events
  • Elections 2022
    • Amendments and Referendums
    • Presidential Election
    • Campaign Finance
    • City Elections
    • Congressional
    • Constitutionals
    • Courts
    • Governor
    • Polls
    • Voting Rights
  • Florida
    • Federal Politics
    • Florida History
    • Florida Legislature
    • Florida Legislature
    • Ron DeSantis
  • Health & Society
    • Flagler County Health Department
    • Ask the Doctor Column
    • Health Care
    • Health Care Business
    • Covid-19
    • Children and Families
    • Medicaid and Medicare
    • Mental Health
    • Poverty
    • Violence
  • All Else
    • Daily Briefing
    • Americana
    • Obituaries
    • News Briefs
    • Weather and Climate
    • Wildlife

A Recession Ahead Is Likelier Than a Soft Landing

May 2, 2022 | FlaglerLive | 6 Comments

A soft landing may out of the Fed’s reach. Oliver Furrer/Stone Getty Images
A soft landing may out of the Fed’s reach. Oliver Furrer/Stone Getty Images

By Alex Domash and Lawrence H. Summers

The Federal Reserve will likely soon learn what gymnasts already know: sticking a landing is hard.




With inflation surging to a new 40-year high and continuing to accelerate, the Fed is expected to lift interest rates by a half-percentage point at the end of its next meeting on May 4, 2022. It will be the second of seven planned rate hikes in 2022 – following a quarter-point increase in March – as the Fed tries to cool consumer demand and slow rising prices.

By raising interest rates, the central bank is hoping to achieve a proverbial “soft landing” for the U.S. economy, in which it’s able to tame rapid inflation without causing unemployment to rise or triggering a recession. The Fed and professional forecasters project that inflation will recede to below 3% and unemployment will remain under 4% in 2023.

Our recent research, however, suggests that engineering a soft landing is highly improbable and that there is a significant likelihood of a recession in the not too distant future.

That’s because high inflation and low unemployment are both strong predictors of future recessions. In fact, since the 1950s, every time inflation has exceeded 4% and unemployment has been below 5%, the U.S. economy has gone into a recession within two years.




Today, inflation is at 8.5% and unemployment is at 3.6% – suggesting a recession will be very hard to avert.

Behind the curve

Inflation is fundamentally caused by too much money chasing too few goods.

In the short run, the supply of goods in the economy is more or less fixed – there is nothing that fiscal or monetary policy can do to change it – so the job of the Fed is to manage total demand in the economy so that it balances with the available supply.

When demand runs too far ahead of supply, the economy begins to overheat, and prices rise sharply. In our assessment, measures of overheating – such as strong demand growth, diminishing inventories and rising wages – began to show in the economy throughout 2021. But a new operating framework that the Fed adopted in August 2020 prevented the Fed from taking action until sustained inflation was already apparent.

As a result, the Fed is way behind the curve today in responding to an overheating economy.

Sticking a soft landing is hard

To bring down surging inflation, the Fed will now try to raise interest rates to curb consumer demand.

The resulting increase in borrowing costs can help slow economic activity by discouraging consumers and businesses from making new investments. But it would come at the risk of causing major economic disruptions and pushing the economy into a recession. This is the soft landing: Interest rates rise and demand falls enough to lower inflation, but the economy keeps growing.

The history of engineering soft landings is not encouraging, however. We found that every time the Fed has hit the brakes hard enough to bring down inflation in a meaningful way, the economy has gone into recession.

While some have argued that there have been several examples of soft landings over the last 60 years, including in 1965, 1984 and 1994, we show in our analysis that these periods had little resemblance to the current moment.

In all three episodes, the Fed was operating in an economy with significantly higher unemployment, lower inflation and lower wage growth. In these historical examples, the Fed also raised interest rates well above the inflation rate – unlike today, where inflation is at 8.5% and interest rates are projected to remain below 3% through 2023 – and explicitly acted early to preempt inflation from spiraling, rather than waiting for inflation to already be excessive.

Why is the labor market relevant for inflation?

One reason the Fed’s challenge is particularly difficult today is that the labor market is unprecedentedly tight, meaning the demand for workers is far outpacing the available supply of them. A tight labor market implies that companies need to raise wages to attract new workers.




Usually, the unemployment rate is used as an indicator for labor market tightness. Unemployment is very low today, and the Fed expects it to go even lower. But our research shows that the pressure to raise wages is even higher than indicated by the unemployment rate. The number of job openings are at all an all-time high, and workers are quitting at record rates – both of which are significant for driving up wages.

In a sense, wages are the ultimate measure of core inflation – more than two-thirds of business costs go back to labor – so rising wages put significant upward pressure on inflation. Wage growth today is running at a historic rate of 6.6% and accelerating.

With wages rising so fast, there is little basis for optimism that inflation can slow to the 2% range targeted by the Fed. Our analysis shows that current wage growth implies sustained inflation above 5%, and that historically wage growth does not slow without significant increases in unemployment and a recession.

The odds of recession

The U.S. economy today is facing additional inflationary pressures from higher grain and energy prices due to the Ukraine war and more supply-chain disruptions as COVID-19 forces new lockdowns in China. These factors threaten to exacerbate inflation even more over the coming year.

[Over 150,000 readers rely on The Conversation’s newsletters to understand the world. Sign up today.]

In our assessment, the inflation problem facing the Fed today is substantial and unlikely to be resolved without a significant economic slowdown. Overall, the combination of an overheating economy, surging wages, policy delay by the Fed and recent supply shocks means that a recession in the next couple of years is certainly more likely than not.The Conversation

Alex Domash is Research Fellow at Harvard Kennedy School. Lawrence H. Summers, who was treasury secretary in the Clinton administration and director of the National Economic Council during the Obama administration, is Charles W. Eliot University Professor at Harvard Kennedy School. He was also the university’s president from 2001 to 2006.


The Conversation arose out of deep-seated concerns for the fading quality of our public discourse and recognition of the vital role that academic experts could play in the public arena. Information has always been essential to democracy. It’s a societal good, like clean water. But many now find it difficult to put their trust in the media and experts who have spent years researching a topic. Instead, they listen to those who have the loudest voices. Those uninformed views are amplified by social media networks that reward those who spark outrage instead of insight or thoughtful discussion. The Conversation seeks to be part of the solution to this problem, to raise up the voices of true experts and to make their knowledge available to everyone. The Conversation publishes nightly at 9 p.m. on FlaglerLive.

Previous Conversations:

  • Understanding the Heat Dome: Why America Is Baking
  • Endorsements Aren’t As Influential as You Think
  • Wiccan Celebrations and the Permanence of Change
  • Privacy Isn’t In the Constitution. But It’s Everywhere in Constitutional Law.
  • Anti-Trans Legislation and Lawsuits Are Pushing back Against Chosen Pronouns
  • How Mike Pence’s Unremarkable Actions on Jan. 6 Saved the Nation
  • Blaspheming Human Rights: The Hypocrisy at the Core of Authoritarian Muslim Nations
  • There Is No One ‘Religious View’ on Abortion
  • Inflation Is Spiking. Can the Fed Raise Interest Rates Without Spiking Unemployment, Too?
  • Blaming ‘Evil’ Is Not Enough
  • Did the 1994 Assault Weapons Ban Diminish Mass Shootings? Yes.
  • Crowded Primaries Are Good for Extremists, Bad for Voters
  • To Get Safe Schools, Mental Health Resources Are Critical
  • Antarctica’s Riskiest Glacier Is Losing Its Grip
  • The Legal Age to Buy Assault Weapons Doesn’t Make Sense

See the Full Conversation Archives
Print Friendly, PDF & Email
You and your neighbors collectively read our articles about 25,000 times each day (that's not a typo) with up to 65,000 daily reads during emergencies like hurricanes. Flagler County residents rely on FlaglerLive for essential, bold and analytical journalism that cannot be found anywhere else. But we depend on your support. Please join our December fund drive! If you donate the cost of a scoop of ice cream, you will be helping us continue to provide comprehensive local news and honest, serious journalism for our community. If you can donate more or become a monthly donor, even better. Donations are tax deductible since FlaglerLive is a 501(c)(3) non-profit news organization. Donate by clicking anywhere in this box. Think of it as buying a scoop, in every sense of the term!  
All donors' identities are kept confidential and anonymous.
   

Reader Interactions

Comments

  1. Jimbo99 says

    May 2, 2022 at 9:42 pm

    Biden-Harris is the problem.

    Reply
  2. Dennis C Rathsam says

    May 3, 2022 at 7:11 am

    What else can you expect from Biden & the demoRATS! Everything he touches turn into a mess! Everything!!!! It took him less than a year to kill the prosperity, and the growth we had under President Trump. The demoRats thought they had a better idea, its playing out now.Right before your eyes….199 days away from nuetering this fool in the White House.

    Reply
  3. fredrick says

    May 3, 2022 at 7:56 am

    Thank you Joe Biden and the far left democrats….

    Reply
  4. Sherry says

    May 4, 2022 at 4:02 pm

    Ah yes. . . hate filled comments from the “usual suspect” cult members who are “legends in their own minds”, while they do nothing but spew quotes from FOX and the expert imbeciles on YOU TUBE.

    Not to confuse anyone with actual facts:

    DOW JONES 1/20/21 about 31,000 . . . . VS TODAY= 34,036
    UNEMPLOYMENT RATE Jan. 2021 6.3%. . . VS Mar. 2022= 3.6%
    GDP 2019 4% (2020 under trump took a hit due to pandemic). . . VS First Quarter of 2022= 5.5%

    * Current CPI/Inflation Rate Averaged 3.6% from 2016- 2022 . . . VS Currently at about 8.5% pressures from pandemic and Russian War

    Reply
    • FlaPharmTech says

      May 4, 2022 at 10:24 pm

      Thank you for being a voice of reason in this good old boys’ town.

      Reply
  5. J. Michael Kelley says

    May 5, 2022 at 1:39 pm

    Well written piece. One more part to the puzzle is the Government debt and ongoing Government deficit spending. Both sides are guilty. Unless our government makes drastic changes in their spending habits, the Federal Reserve may be the only hope to tame the rate of inflation before it takes a bucket full of money to buy a loaf of bread.

    Reply
  • grand living realty
  • politis matovina attorneys for justice personal injury law auto truck accidents

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Advertisers

  • grand living realty
  • politis matovina attorneys for justice personal injury law auto truck accidents

Recent Comments

  • Pierre Tristam on The Hung Jury Got It Right in the Monserrate Teron Trial
  • blerbfamilyfive on Why Will Furry Is Demolishing the Flagler Youth Orchestra
  • We believe the girl on The Hung Jury Got It Right in the Monserrate Teron Trial
  • DAVE on Flagler Pride Fest Is On Despite Hostile Climate, Drag Show Included, With a Few Cautionary Tucks
  • Blame Game on No, Flagler Beach Isn’t Asking for Money. It’s Asking for Cooperation from County and Cities.
  • Laurel on Behind the Divorce, a Bitter, Threat-Ridden Clash Between Waste Pro and Palm Coast Over Recycling Bins
  • Deborah Coffey on Wadsworth Elementary’s Paul Peacock Is Told He’s Done in Flagler Schools; New Principal To Be Named Later
  • Flatsflyer on Wadsworth Elementary’s Paul Peacock Is Told He’s Done in Flagler Schools; New Principal To Be Named Later
  • Greg on No, Flagler Beach Isn’t Asking for Money. It’s Asking for Cooperation from County and Cities.
  • Bailey’s Mom on Wadsworth Elementary’s Paul Peacock Is Told He’s Done in Flagler Schools; New Principal To Be Named Later
  • jake on Flagler Pride Fest Is On Despite Hostile Climate, Drag Show Included, With a Few Cautionary Tucks
  • Dennis Clark on No, Flagler Beach Isn’t Asking for Money. It’s Asking for Cooperation from County and Cities.
  • Bryan on “A Fitting Conclusion”: Family Speaks of Pilot Ray Miller’s Life of Adventure Before Crash
  • Ray W. on The Hung Jury Got It Right in the Monserrate Teron Trial
  • Ray W. on The Hung Jury Got It Right in the Monserrate Teron Trial
  • Dee on Wadsworth Elementary’s Paul Peacock Is Told He’s Done in Flagler Schools; New Principal To Be Named Later

Log in