Economists at Jackson Hole dismiss U.S. recession fears, suggesting rate cuts ahead as the Fed aims for a soft landing amidst a slowing but stable labor market. Leading economists at the Federal Reserve’s summer retreat in Jackson Hole, Wyoming, expressed that concerns over a U.S. recession may be overstated. Despite recent signs of a softening labor market, experts are optimistic about the economy’s health.
Karen Dynan, an economics professor at Harvard University, asserted that the economic fundamentals remain robust. “The underpinnings of the economy look good. Things look pretty solid,” she said. Dynan noted that typical recession scenarios involve apparent underlying weaknesses that are not present.
Recent fears about a potential recession have intensified following weaker-than-expected July jobs data. The data indicated a decline in labor-market demand, with diminishing income gains and increasing layoffs. Michael Feroli, chief U.S. economist at JPMorgan Chase, highlighted these issues in a recent client note, suggesting that while the labor market is slowing, it does not necessarily indicate an impending downturn.
The unemployment rate dropped to a historic low of 3.4% in April 2023 and rose to 4.3% by July. Historically, such increases have been precursors to recessions, but Dynan argued that current conditions are unique. She pointed to a significant wave of immigration over recent years, contributing to the rise in unemployment as new arrivals enter the job market.
Former Fed Vice-Chair Alan Blinder downplayed recession fears, suggesting that the likelihood of a recession is no higher than the typical 15% chance. “You have to slow the airplane down to get a soft landing,” Blinder said, emphasizing that current conditions do not indicate imminent economic decline.
Economists at Jackson Hole Dismiss U.S. Recession Fears
Fed officials, including former Kansas City Fed President Esther George, echoed a similar sentiment. George noted that the labor market’s current status is manageable and not necessarily a signal of a forthcoming recession. “The consumer, so far, has held up,” she added.
Looking ahead, Fed Chair Jerome Powell indicated in his Friday speech that a rate cut in September is likely, marking the first such move in four years. While the size of the potential cut remains uncertain, most analysts at Jackson Hole anticipate a modest 25-basis-point reduction in the federal funds rate. A weak August jobs report, due September 6, could prompt a more substantial cut of 50 basis points.
Bond market traders, however, are reflecting concerns about a potential recession. Some derivative markets have priced in risks associated with significant Fed rate cuts. Former Kansas City Fed President Thomas Hoenig warned that aggressive rate cuts could reignite inflation. “Recession is always possible, but things are pretty steady right now. There is no necessary outcome that we have a recession,” he said.
Economists at Jackson Hole expect the Fed to implement gradual rate cuts, potentially reducing rates by two or three quarter-point cuts before pausing to assess the economic landscape. Blinder suggested that some cuts could be more significant, up to 50 basis points.
With the Fed’s benchmark rate currently at 5.25%-5.5% and an ideal rate for steady economic conditions estimated at around 2.8%, the central bank faces the challenge of navigating economic adjustments while maintaining growth and controlling inflation.
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