We’re Not In A Recession, But We Could Be Soon

by | Jul 29, 2022 | Politics

There is a political debate over whether the U.S. economy is in a recession. Republicans say that because gross domestic product, a key economic metric, has been negative for the past two quarters, that’s a recession. Democrats point out, correctly, that job growth is strong and the definition of a recession is not so simple.But the debate misses an important point: There is a real risk of recession, and whether one happens is largely a decision of the U.S. government. The Federal Reserve is hiking interest rates to quell inflation, and there could be major collateral damage. “We’re not trying to have a recession,” Federal Reserve Chair Jerome Powell said this week. “And we don’t think we have to.”AdvertisementHigher rates make money more expensive to borrow, which makes people and businesses spend less. This results in less overall demand for goods and services, which hopefully leads to companies lowering their prices to win over shyer buyers. A potential side effect of lower consumer spending is millions of people losing their jobs — but Powell doesn’t say it that way.“If you translate Fed-speak into people-speak it doesn’t sound great,” Claudia Sahm, a senior fellow at the Jain Family Institute and a former Federal Reserve economist, said in an interview with HuffPost. Sahm praised Powell for communicating more to the public than his predecessors. But Fed-speak is abstract. Powell says inflation is caused by an imbalance of supply and demand, with too much of the latter and not enough of the former. Raising interest rates reduces demand, and that’s how the Fed restores balance. He acknowledges that achieving balance will involve a necessary “softening of labor market conditions.” AdvertisementThe big question: How much softer should the labor market get? Powell said that desp …

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