There's snow outside my window, twinkle lights on the tree, my Spotify Wrap has wrapped and virtually all of my emails end with "we'll deal with that next year." In my book, that's as good a time as any to reflect on what 2023 brought us. Or didn't bring us...
Which leads me to tonight's subject: the recession that never came.
Here's the deal: This time last year, all the smart money was on a 2023 recession. But, as my colleagues Elisabeth Buchwald and David Goldman write, those predictions from some of the world's top economists got steadily revised month after month until it became clear that the dreaded downturn wasn't going to arrive. (At least, not this year.)
So the question is: How? After all, the economists who predicted a recession weren't just spitballing. The Fed spent the past 20 months doing everything in its power to slow America's economy down to combat inflation, knowing full well it risked overdoing it and inadvertently causing millions of Americans to lose their jobs.
Yet nearly two years in, the Fed may have done the thing few thought was possible — reining in inflation without plunging us into a recession.
Despite all the stress of high interest rates, businesses are thriving, jobs are plentiful, wages are rising and consumers are still spending.
How'd Jay Powell and his pals at the Fed pull it off? Heaps of luck, and a fair bit of skill.
The pandemic set off a chain of twists and turns that no policymaker could control and that wound up giving the Fed some cover:
- The job market stayed strong in part because so many people left their jobs (remember the Great Resignation?). That left businesses short-staffed and desperate to hire.
- As a result, employers had to raise wages to hire and keep workers.
- The net effect was a tight labor market that could withstand the pain of rate hikes.
Some other luck factored in:
- Americans bought a lot of stuff with their stimulus checks and their bigger paychecks, keeping the US economic engine humming.
- Taylor Swift launched her Eras Tour. (Seriously, even the Fed credits Tay for helping stimulate the economy.)
- A mini banking crisis this spring wound up doing some of the Fed's work for it. The collapse of Silicon Valley Bank and other regional lenders slowed the economy just enough that the Fed could ease up a bit on rate hikes.
The Fed deserves credit, too.
The central bank generally, and Jay Powell in particular, received criticism from the right and the left. But the independent Fed held steady on its plan to bring inflation in line — a feat it has almost fully achieved.
Although prices in many cases remain significantly higher than they were two years ago, the Fed brought inflation down to an annual rate of 3.1%, down from its peak of 9.1% over a year ago. That's still above its target of 2%, but the Fed predicts it will gradually get there by 2026.
If the Fed had given in to critics on either side, we'd likely be seeing a) an economy still running too hot, with rampant inflation, or b) a slowing economy with rampant unemployment.
"Most people don't think about what the alternative could have been," Lael Brainard, former Fed vice chair and current director of President Biden's National Economic Council, told CNN on Friday. "But obviously, forecasters did put out very clearly what they anticipated a year ago ... that there would be major job losses and a recession in order to get inflation to where it is today."
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