America’s economy is winding its way down a treacherous road from the highest peak in inflation in 40 years. But a soft landing, once a faint hope, is now among the plausible outcomes
throughout the world three years ago, many pored over the history of a previous pandemic, the Spanish flu of 1918-19, for clues about how the disaster would unfold. Now that the plague has abated, history may also provide a few lessons for the aftermath. As the first world war and the Spanish flu receded, interest rates were low and government spending high. Inflation surged. In order to bring prices back under control, America’s central bankers cranked rates up, triggering a severe recession.
Other indicators confirm this bleak outlook. Consumer sentiment, as measured by a closely watched survey from the University of Michigan, plunged to an all-time low last year. The collapse of Silicon Valley Bank and a couple of other financial institutions in March provided evidence that the rapid rate hikes are harming vulnerable firms, and the ensuing financial instability added to economic headwinds. Banks have made their lending standards much stricter, another sign of a looming recession.
To say that the combination of ebbing inflation and a robust labour market is unexpected is an understatement: many economists had assumed it was impossible. They had believed that there was a short-term trade-off between jobs and prices: that, all else being equal, a low unemployment rate is associated with a rising inflation rate, a relationship known as the Phillips curve.
The yield-curve inversion could also be misleading. Long-term rates may have fallen below short-term ones not because a recession is imminent, but for a far more pleasant reason: that as inflation melts away, the Fed will be able to lower rates. Provided it can make those cuts before growth gives out, it will have a good chance of guiding America to a soft landing.
What could go wrong? Policy lags are a known unknown that could yet trip up the economy. Lags refer to the length of time needed for changes in monetary policy to start affecting business activity. Economists used to think that it could take more than two years for a rise in interest rates to ripple through the economy.
Even if inflation falls again in July and August, there are also questions about how low it will go if the number of vacant jobs continues to outstrip the number of available workers to such a large extent. Olivier Blanchard, a former chief economist of the International Monetary Fund, and Ben Bernanke, a former chairman of the Fed, estimated in a paper in May that, at the current level of tightness in the labour market, the unemployment rate would need to rise above 4.
Belgique Dernières Nouvelles, Belgique Actualités
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