The White House is scrambling to tamp down fears of a recession as high inflation and the Federal Reserve’s attempts to rein it in boost the risks of a downturn. President Biden and top administration officials have spent days attempting to reassure the American public that the U.S. economy is not destined to slip into recession. Despite growing alarm among consumers, business leaders and economists, the administration has signaled hopefulness in the economy’s resilience.
White House press secretary Karine Jean-Pierre told reporters on Tuesday that the U.S. is in a “moment of transition.” She pointed out some positive economic figures, like the low unemployment rate and strong household balance sheets and business investment.
“We’re not in a recession right now,” Jean-Pierre said. “Right now, we’re in a transition where we are going to go into a place of stable and steady growth and that’s going to be our focus.”
Biden also told reporters Sunday he doesn’t think a recession is “inevitable,” comments in line with remarks made by Treasury Secretary Janet Yellen last week. The president added he had just spoken with former Treasury Secretary Larry Summers, who asserted Saturday that inflation could not fall unless millions of Americans lose their jobs.
Summers has been the fiercest Democratic critic of Biden’s economic policy and warned last year the president’s proposed stimulus bill would likely spur rampant inflation.
But economists across the ideological spectrum see the risks of a recession growing as the Federal Reserve races against rising prices.
Economists at Goldman Sachs have boosted their odds of the U.S. hitting a recession this year from 15 percent to 30 percent and the odds of a recession in 2023 from 35 percent to 48 percent.
They said the Fed’s announcement last week of the biggest interest rate increase in almost three decades may have brought the U.S. closer to a tipping point.
“We are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” Goldman Sachs economists David Mericle and Ronnie Walker wrote in a Monday research note.
The Goldman economists are among a growing group of experts concerned that the Fed would need to keep boosting interest rates to fight inflation well past a point that would bring the U.S. economy to a halt.
The Fed last week announced it would raise its baseline interest rate range by 0.75 percentage points, the first hike of that size since 1994, after a particularly alarming May inflation report.
As the Fed raises its baseline interest rate range, borrowing costs rise and economic activity tends to slow. Consumers typically pull back spending as their credit card interest rates, auto loans and other credit products get increasingly expensive. Businesses also tend to reduce spending, investment and hiring as their sales fall and their own borrowing costs spike.
The Fed’s previous rate hikes in March and May have taken a toll on the housing and stock markets. But prices still rose 1 percent in May and 8.6 percent over the past 12 months, according to the Labor Department’s consumer price index, a closely watched gauge of inflation.
With inflation surging and consumer confidence falling, the Fed must strike a careful balance between assuring markets it will do whatever it takes to curb prices and keep fears of a slowdown in check. If Fed Chairman Jerome Powell shows undue allegiance to either side of the Fed’s dual mandate of price stability and maximum employment, experts say the consequences could be severe.
David Beckworth, senior research fellow at the libertarian learning Mercatus Center think tank, called it a “delicate dance.”
“They’ve got to make the moves and impress their partner, the public, that they’re really serious about keeping inflation reined in and they’re so serious that they’re willing to cause a recession, without actually causing a recession,” Beckworth said. “That is tough to pull off.”
Fifty-six of respondents to a poll from The Economist and YouGov released last week believe the U.S. is already in a recession. More than 60 percent of CEOs see a recession on the horizon in 2023, according to Conference Board poll, a sign of alarm from people with the power to bring the economy to a halt with layoffs and cutbacks.
Powell said Wednesday the Fed is not attempting to induce a recession and that he still believed it was possible — If not necessarily likely — for the bank to bring inflation down without job growth stalling and gross domestic product shrinking. Even so, he made clear that reducing inflation was the Fed’s top priority regardless of its short-term implications.
“We never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability,” Powell said Wednesday after the Fed hiked rates.
While the Fed’s steep rate hike shook markets, many economists agreed it was the right step for the bank to take amid uncertain and difficult circumstances. The war in Ukraine is likely to boost pressure on oil, food and commodity prices for several months, which could feed into price increases in other areas of the economy.
Even so, some fear the Fed may have gone too far to curb inflationary pressures largely beyond its control.
“I don’t mean to sound pollyannish, and recession risks are awfully high, no doubt about it. But I don’t think we should talk ourselves into a recession, which feels like what we’re doing,” said Mark Zandi, chief economist at Moody’s Analytics, in an interview with CNBC’s “Squawk Box” last week.
“At the end of the day, a recession is a loss of faith.”
Morgan Chalfant contributed.