Mar 5, 2023 - Economy

The permanent recession that never arrives

Data: YouGov; Chart: Axios Visuals
Data: YouGov; Chart: Axios Visuals

Markets tremble at the Federal Reserve's every twitch. And yet, it doesn't seem to be able to have much effect on the actual economy.

Why it matters: The Fed's main policy tool — more important even than its ability to set interest rates or print money — is the trust that Americans have in its power. Increasingly, however, it seems to have power only over the relatively narrow realm of the financial and housing markets.

Where it stands: According to public opinion, the U.S. is seemingly in a semi-permanent recession, and the Fed has failed to improve matters.

  • In reality, the economy is hot, unemployment is at record lows, and there's no sign of a downturn any time soon.
  • A recession is inevitable eventually, but economists' forecasts for when it might arrive keep on getting pushed back.

Why it matters: If the U.S. economy does enter a recession soon, it'll be because the Fed has been hiking rates more aggressively than any time since 1980.

Between the lines: A lot of the Americans who think we're in a recession are deeply upset about inflation. But if the central bank's actions aren't consequential enough to reduce upward price pressures, they're unlikely to tip he economy into recession.

  • Inflation has come down since the Fed started tightening, but it's far from clear that inflation came down because of Fed hikes.

What they're saying: "The increase in interest rates has slowed several sectors of the economy, most notably housing and commercial real estate," Atlanta Fed president Raphael Bostic said last week.

  • "However, other parts of the economy have not slowed so much."
  • "Consumer spending has remained robust," he said, adding that GDP growth figures are still running "stronger than expected".

What we're watching: There are many factors that could explain the Fed's seeming impotence — from more efficient companies with less need for capital, to more liquid banks, to high inequality. Axios' Neil Irwin surveyed some of the theories on Friday.

The bottom line: The Fed's actions have had enormous effects on both stocks and the bond market. But so far the real economy doesn't seem to have noticed.

Editor's note: This story has been updated to correct the spelling of Raphael Bostic's name.

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