The stock market still hasn’t completely accepted the likelihood of a recession forced by the Federal Reserve’s interest rate increases. And there’s still optimism about interest rate cuts in the second half of 2023.
But I sense that the market consensus is moving on from the hopes for a soft landing–where higher interest rates slow the economy and whip inflation without causing a recession–to what Bloomberg today called a “growth recession.”
More negative than a soft landing, a “growth recession” is an extended period of meager growth and rising unemployment. But it stops short of a recession and a contracting economy.
Powell “buried the concept of a soft landing” with his August 26 speech in Jackson Hole, Diane Swonk, chief economist at KPMG, told Bloomberg’s Rich Miller. Now, “the Fed’s goal is to grind inflation down by slowing growth below its potential,” which officials peg at 1.8%.
“It’s a bit like dripping water torture,” added Swonk. “It is a torturous process but less torturous and less painful than an abrupt recession.”
In an archetypal soft landing like that of 1994-95, Miller writes (https://www.bloomberg.com/news/articles/2022-08-31/powell-abandons-soft-landing-goal-as-he-seeks-growth-recession?sref=lMnwWs6p), the Fed slowed the economy briefly and contained inflation through a doubling of interest rates. But unemployment never really rose. It just stopped falling.
“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said in his Jackson Hole speech. “Moreover, there will very likely be some softening of labor market conditions.” That’s Fed-speak for higher unemployment.
One way to look at this shift from hopes for a soft landing to hopes for a growth recession is that it marks a narrowing of the margin for error in the economy. In a growth recession scenario there’s a higher likelihood of a mistake that will move the economy into a recession.
