It seems more and more unlikely that the U.S. economy will end up in a recession either at the end of this year or in 2024. First, the Federal Reserve and the largest banking institutions such as JP Morgan and Goldman Sachs, have forecast that a recession is no longer imminent, let alone happening anymore. Now the Department of the Treasury believes that a recession is no longer on the horizon.
Indeed, Treasury Secretary Janet Yellen said in an interview on Sunday that she is "feeling very good" about the U.S. making a soft economic landing without a recession. She cited recent data showing a steady slowdown in inflation and a fresh influx of job seekers as evidence that the economy is on track.
However, Yellen also acknowledged that there are risks to the outlook, including the ongoing war in Ukraine and rising interest rates. She said that the Federal Reserve will need to be "careful and deliberate" in its efforts to raise rates, and that it is important to avoid "overdoing it."
A soft landing is a situation in which the Federal Reserve is able to raise interest rates enough to bring inflation under control without causing a recession. This is a difficult task, and there is no guarantee that the Fed will be successful. However, Yellen's comments suggest that she is confident that the U.S. economy is strong enough to withstand the Fed's tightening cycle.
There are some important factors to look for when we discuss a soft landing. The first factor is the pace of inflation. Certainly, if inflation continues to rise, the Fed will need to raise rates more aggressively, which could increase the risk of a recession. The second factor is the strength of the labor market. The third factor is the response of businesses and consumers to higher interest rates. If businesses and consumers start to cut back on spending in response to higher interest rates, it could lead to a recession. However, the current economic condition shows that consumer spending remains strong despite higher interest rates.
The Federal Reserve has been raising interest rates without causing a recession so far. As was aforementioned, the Federal Reserve has been implementing quantitative tightening (QT) by selling off government bonds to remove liquidity from financial markets in order to fight inflation. Despite the use of quantitative tightening, markets did not behave as we would expect when QT is usually enforced. Investors have shown a surprising optimism over asset prices, which in turn increased their prices. The stock market is currently in bullish territories while interest rates remain quite high.
While Yellen’s confidence has merits, there is still no guarantee that the economy will necessarily end in a soft landing. The Federal Reserve is still committed to reducing consumer demand by maintaining interest rates high and applying quantitative tightening. If the Fed keeps raising interest rates, it could lead to a recession. Thus, the forthcoming Fed meetings will determine the trajectory of the economy.
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