Economists see signs of resiliency despite looming concerns about a recession

WASHINGTON (TND) — Federal Reserve chairman Jerome Powell is less confident in fiscal policymakers’ ability to engineer a “soft landing” for the economy while cutting down inflation.

Powell, who was confirmed for a second term on Thursday, told NPR high inflation and potential economic downturns in Europe and China could make the Fed’s objective more difficult to achieve.

“There are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so,” Powell said. “So, the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”

Many economists have doubted the Fed’s ability to avoid sending the economy into a recession by raising interest rates to cool demand and criticized the agency for reacting too slowly to rising inflation.

The Fed raised its benchmark interest rate by a half-percentage point last week and signaled more hikes may come if blistering consumer demand doesn’t slow as a result. Higher interest rates make it more expensive to borrow for mortgages, credit cards and vehicle loans.

Fiscal policymakers have also started to shrink the Fed’s multitrillion-dollar balance sheet, which reduces the amount of money available for banks to loan and raises interest rates to cool demand.

“I’m not saying this will be easy to do, in principle, you could moderate demand, reduce demand to the point where job openings move down substantially, and the labor market gets much closer to being in balance,” Powell told NPR.

Consumer demand has kept up with high inflation and squeezed companies trying to make enough goods to go around.

There is so much pent-up demand from all the COVID years,” said Farrokh Langdana, professor of finance and economics at Rutgers Business School. “There's a lot of pent-up demand and keep in mind, private consumption for Americans — that's like 70% of our economy.”

A tight labor market creates another challenge for the Fed as businesses compete for a limited pool of workers. There are a record-high two job openings for every American who is unemployed.

Other factors like the status of European and China’s economies are beyond the Fed’s reach. Russia’s war in Ukraine has added complications to the world’s energy supply and made food expensive by cutting off exports of wheat.

In China, major ports are shut down in Shanghai while the government tries to contain a coronavirus outbreak through strict lockdown measures. A lack of exports from China is damaging an already-battered supply chain that has not resumed pre-pandemic levels of efficiency.

The connectedness of the world’s economies is generally considered an indicator that downturns by major nations like China or Germany could pull down the U.S. along with it. But it may be too soon to say exactly what effect overseas downturns would have.

“These are winds that that are tending to cool the economy in terms of activity in terms of prices, though less demands tends to reduce prices, but less supply tends to increase prices,” said Antonio Doblas-Madrid, associate professor of economics at Michigan State University. “It's unclear which way we'll go.”

Options for fiscal policymakers are limited to deal with those problems but lifting tariffs could help ease the downturn of other economies and lower prices for consumers. The White House said it is considering dropping some tariffs on Chinese exports but has not announced a decision yet.

“The sooner we get rid of those tariffs on the rest of the world, the better for us because consumers, customers pay those tariffs,” Langdana said.

Even with concerns of a recession, some economists are hopeful the U.S. economy will be able to withstand a period of decreased growth.

There are some reasons to believe that the economy can be fairly resilient,” Doblas-Madrid said. “We have a very, very strong labor market with very low unemployment rate, a record number of job openings vacancies. We also have a corporate sector that has enjoyed very high profits and is sitting on the large cushions of cash and funds that they can use to ride out any sort of slowdown.”

Managing consumer and business expectations, along with preventing inflation from becoming entrenched into prices is another test for federal policymakers.

“This Fed needs to get its messaging right and say ‘we are attacking inflation early; we are slowing down an over-superheated labor market. Soon, more workers will be coming back to work and we are very confident we are on track,’” Langdana said.

Managing expectations and getting the economy to the next step of the recovery is where there will be an opportunity for the U.S. to rebound, he said.

“(Innovation is) where we need to bounce back,” Langdana said. “We've always come up with the next big thing. It's been us Americans and I really am expecting that coming back from us in the near future.”