A Harvard economist says the economy looks bad right now, but a recession isn’t a sure thing. It all depends on these 2 factors
These days the economy seems to be on needles and needles.
Stocks are plummeting, investors are on edge and the murmuring that we are in for a recession continues.
Things are looking bad right now, but one economist refuses to be sucked into fears of a worst-case scenario - saying two key factors suggest a recession is far from certain.
In an interview with the Harvard Gazette on Wednesday, Jason Furman, a Harvard professor and former economics adviser to the President under Barack Obama, said the current market volatility is an inevitable consequence of the Federal Reserve's policy of raising interest rates to keep US inflation under control fight.
Furman isn't surprised that the stock market is behaving so erratically these days, and suggests it may even have been inevitable.
"One thing that runs through the whole economy is interest rates," he said. "When interest rates rise, it becomes more attractive for investors to move their money into bonds and out of stocks, and that causes stocks to fall."
President Biden has made it clear that bringing the country's inflation rate down, which was last seen at 8.3%, is a top domestic priority. To that end, the Federal Reserve has been raising interest rates gradually since March, which would inevitably have some impact on the stock market.
Furman said other factors, such as the COVID lockdowns in China affecting manufacturing, have hurt stock indexes, particularly the tech-heavy Nasdaq. But there's still just "one story that runs through it all — and that's interest."
But that doesn't mean that higher interest rates don't pose a risk to the economy at all. The Fed's attempts to steer its way out of inflation could end in one of two ways: a soft landing for the economy - in which inflation eases without a significant slowdown in economic activity or a massive rise in unemployment - or a hard landing, also known as the economic crash.
Saving the economy
Luckily for the economy, Furman says two factors seem in favor of a soft landing: consumer activity and gas prices.
Despite higher prices across the economy, consumer activity has remained strong this year, largely due to the large savings that US shoppers have amassed during the pandemic. Whether US consumers are able to continue shopping during the inflationary storm will be a key factor in whether or not a recession occurs, Furman said.
"I'm relatively unconcerned about a recession next year as consumer spending remains very strong and consumers have about $2.3 trillion in excess savings accumulated during the pandemic that will continue to be spent for years to come." could become. ' Furman said.
The idea that US consumer strength could keep the economy out of recession is rooted in the country's low unemployment rate and large pandemic-era savings, and Furman isn't alone in believing that.
Investment bank Goldman Sachs has found a similar silver lining, recently assuring investors that while the risk of a recession is rising, "the financial health of the private sector may ultimately decide whether tightening policy will plunge the economy into a downturn." .
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