The likelihood of a recession has increased due to the Fed’s efforts to combat ensuing inflation. Although the economy is healthy, it is decelerating, and inflation is likely at its high. In their efforts to fight inflation, they risk stifling growth. If interest rates are increased too quickly or drastically, they will cause a recession. Achieving a “soft landing” is problematic.
The moment of most significant economic duress in the United States is likely over. Demand is falling, and enterprises’ pricing clout is diminishing: This will let inflation rates moderate for the remainder of the year. However, reducing inflation is distinct from eliminating inflation. Inflation will likely remain over 2 percent next year and beyond.
If a recession occurs in 2023, there are solid grounds to predict it to be moderate, given that the causes of the most severe forms of recessions are less likely to occur now. What happens if a recession fails to return price growth to its pre-pandemic slumber? This may readily coexist with the above-target inflation of 2%, notwithstanding the implausibility of present levels. In contrast to the idiosyncratic squeezes we’ve seen so far, such inflation might have sustainable drivers like wages and housing. What stands between a recession with above-target inflation and “stagflation” is the Fed.