Throughout 2022, the Federal Reserve has raised interest rates four times in an attempt to cool down the US economy and reduce inflation. The goal has been to do this without causing a recession, thereby creating a so-called “Soft landing” for the American economy and consumers.
Now, however, economists say the Fed is targeting something that could be far more painful for the average American: a “growth downturn.”
In a speech at an annual symposium in Jackson Hole, Wyoming, on Friday, Fed Chairman Jerome Powell said the US economy is likely experience some “pain” as the central bank continues its battle against inflation.
Diane Swonk, Chief Economist at KPMG, told Bloomberg that, in his opinion, these comments indicate that the Fed has given up on its hopes of a “soft landing” and now recognizes that a “growth recession” is necessary to reduce inflation, which means that the Fed will need to slow growth economical well below its potential.
“It’s a bit like dripping water torture,” he said. “It’s a tortuous process, but less tortuous and less painful than an abrupt recession.”
Swonk’s comments echo statements made by Loreta Mester, president of the Federal Reserve Bank of Cleveland, in an event hosted by the Dayton Area Chamber of Commerce on Wednesday.
“I think the Fed has more work to do to control inflation,” Mester told the audience. “This will involve further rate increases to tighten financial conditions, resulting in an economic transition to below-trend growth in nominal output, slower job growth and a higher unemployment rate.”
Mester added that he thinks the fed funds rate will move to 4% in early 2023 and then stay there for some time.
“I don’t anticipate the Fed lowering the fed funds rate target next year,” he said.
What is a ‘growth downturn’ and will it beat inflation?
The term “growth recession” was coined by economist Solomon Fabricant, a New York University professor and chief economic adviser to President Dwight D. Eisenhower, in a 1972 book called Economic Inquiry: Retrospect and Perspective, Volume 1, The Current Business Cycle.
Dissecting the economic slowdown seen in 1969 and 1970, Fabricant argued that a new definition may be needed to distinguish a true recession from something milder, which, he said, might even be described as a “slowdown.” His solution was the term “growth recession.”
But Bill Adams, Comerica chief economist of the Bank, said Fortune that the Fed may even need to go a step beyond Fabricant’s “growth recession” to bring inflation back to its 2% target amid the european energy crisis Y ongoing heat waves.
“My interpretation of Chairman Powell’s Jackson Hole speech, and in particular, his statements that he expects some pain for households and businesses, is that it sounds a bit worse than a period of below-trend growth for the economy. American,” Adams said. “So I think the Fed would like to see a growth downturn, but is also prepared for the possibility that a full-on recession will be necessary to bring inflation lastingly to its target.”
Still, Jeffrey Roach, chief economist at LPL Financial, said Fortune that an outright recession is not guaranteed.
“The Fed is in a bind,” he said. “The challenge will be to slow down demand, but not necessarily squash it. I don’t think a hard landing is a foregone conclusion. We know that monetary policy takes time to work its way into the real economy, so it’s too early to say whether or not the Fed will be successful with the current tightening cycle.”
Comerica Bank’s Adams agreed that a recession is not certain, but also noted that most of the recession indicators he watches indicate “a recession is more likely than not.”
“I’m seeing the inverted yield curve, the declines in consumer and business confidence surveys, the decline in the Conference Board’s leading economic index for the United States, the decline in housing indicators, and all these Indicators collectively now look like they are typically before previous recessions in the United States,” he said.
Americans are also bracing for a severe economic downturn, with nearly half of American adults already cutting back on discretionary purchases in anticipation of a recession, according to an August report. Bank rate survey.
The decline in the strength of the US economy
Whether the US economy falls into a true recession or a “growth recession,” or avoids a recession altogether, may still be up for debate, but there are clear signs that the strength of the US economy is growing. America is fading.
Gross domestic product (GDP) growth forecasts on Wall Street have been cut repeatedly in recent months. Goldman Sachs now expects US GDP growth of just 1.6% in 2022, one less than 2.4% in May. And the Conference Board cut its forecast for US real GDP growth in 2022 to just 1.3% in August.
“The Conference Board forecasts that economic weakness will intensify and spread more broadly throughout the US economy in the second half of 2022, and expects a recession to begin before the end of the year,” the Conference researchers wrote. nonprofit earlier this month.
Adams said Comerica Bank also cut its forecast for US real GDP in 2022 from 2.4% in July to 1.5% this month due to deteriorating economic conditions.
“I think my broader message about what’s going on in the economy right now is that the current data shows that the economy has slowed dramatically since 2021 and the job market is starting to weaken,” Adams said. “I can see ways the economy could still muddle through and avoid a recession over the next year…but I think the path to that outcome is much narrower than it seemed six months ago.”
EY Parthenon Chief Economist Gregory Daco also expects a recession and a drop in GDP growth. In a research note on Tuesday, Daco said he now expects US GDP to grow just 1.4% this year and just 0.4% in 2023.
“As the surge in summer outlays fades, we anticipate seeing a further drag on consumer spending due to still-high inflation, slowing job growth, shrinking disposable income and rising consumer spending. interest rates. We continue to anticipate that the US economy will experience a recession towards the end of the year,” he wrote.
Sign up for the characteristics of fortune email list so you don’t miss out on our biggest features, exclusive interviews and investigations.