Stop it, stop it, stop it:
First off, it's not true that everyone expected a recession. What everyone expected was that inflation wouldn't go down unless we had a recession. And that was only because "everyone" is apparently an idiot who forgot all about the pandemic of [checks notes] two years previously.
Second, the Fed and the White House had nothing to do with anything. As usual, I invite you to take a look at economic growth:
The Fed began raising rates in the spring of 2022. Following that, nothing happened. Economic growth continued on its normal path.
So either the Fed hikes were small enough that they didn't really do anything or else they were big enough but the economy hasn't responded yet. You can't have it both ways.
Folks, this is just the most rudimentary common sense. You can't say the Fed got inflation down but had no effect on GDP. This is not how things work. Come on.
Regrettably "rudimentary common sense" is not in any way a good metric for the analysis of complex multi-variable phenomena like modern economies although duly noted that Drum, unable to admit his erroneous prognostication on Fed impacts and inflation, is turning to this.
" or else they were big enough but the economy hasn't responded yet. You can't have it both ways."
Fallacy of the Excluded Middle with a healthy helping of Straw Man.
Rather it is a perfectly statistically and econometrically plausible hypothesis that Fed rate rises were sufficient to prevent further overheating of the economy (as like ECB rate rises) and thus both capped off higher inflation but also higher near-term GDP. Indeed this is roughly one of the hypotheses evoked by Krugman. The Fed executing rate rises is not "[f]ollowing that, nothing happened. Economic growth continued on its normal path" as a conclusion, rather a perfectly plausible although counter-factual and thus not exactly knowable is that the Fed rate rises enable a normal path rather than an inflationary nominal GDP forcing from the otherwise rather inflationary US stimuluses right into 2022 - one force off-setting another force effect that by chance ended up generally cancelling out (not to give any pretence of credit to precision, versus a decent dollop of pure luck).
Simplistic single variable thinking has served Drum fine for factors that are sufficient for it, notably like the lead case but frankly embarrassing for econometric analysis here.
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it's a real skill to sound like an obnoxious jerk in every post. but FYI, krugman wrote a column today completely in agreement with kevin's post. so you're also factually wrong in your comment. https://www.nytimes.com/2023/12/18/opinion/inflation-economists.html
krugman wrote a column today completely in agreement with kevin's post. so you're also factually wrong in your comment.
This. Krugman is 180 degrees apart from whatever gobbedygook Lounsbuy is employing contra Kevin, and indeed he is worried that the unnecessary and ineffective Fed tightening may well tip the economy into a recession.
https://www.nytimes.com/2023/12/18/opinion/inflation-economists.html
it's funny, because when i read louns post yesterday i knew it was at odds with krugman's actual stated position, but i didn't want to take the time to google around and compile his various statements into a concise rebuttal. but lo and behold, opened the Times today and saw he'd written the exact column i needed. truly a christmas miracle in service of my own laziness.
curiously, no mention of krugman, cheerleader for team transitory
I don't think the gray rectangle is wide enough. The pandemic lasted until well into 2022 before finally petering out this year.
Did raising rates in mid 1990s slow economic growth?
Fed does not control real gdp, they control nominal gdp.
If they wanted nominal gdp to be 100 trillion in a years time they could make it happen - they have a machine that can print money.
Nominal gdp has gone down - great work fed!
Scott Sumner would be going nuts reading this post.
Of course, there was no, zero, nada involvement by Democrats...
/s, by the way.
Don't forget QEII.
(or was it three...)
I'd thought we'd be in a Fed induced recession by now. Glad to be wrong. Some rate raising was certainly needed--things were getting too bubblicious.
Of course as the Fed was trying to take money out of the economy, Biden was putting some back in. Not sure how well the numbers balanced out, but so far that worked for the economy.
IDK, given that the negative headlines about inflation that started this whole narrative were the reverse, I frankly don't give a shit that they're wrong about the reverse as well. At least it will nudge the narrative towards a reset (if the journos can stomach not being both-sides-ist for long enough) and stop blaming the president for the economy when the president doesn't have much (if any) control over it.
"First off, it's not true that everyone expected a recession."
Kevin, it's true that not everyone expected a recession, but *you* expected a recession.
https://jabberwocking.com/we-cant-put-off-a-recession-forever/
https://jabberwocking.com/two-recessions-are-barreling-toward-us-next-year/
https://jabberwocking.com/a-recession-is-coming-our-way/
https://jabberwocking.com/the-fed-is-gunning-for-a-completely-unnecessary-recession/
https://jabberwocking.com/recession-is-coming/
You expressed a good deal of confidence that the Fed was causing ("gunning for," in one of the posts above) a recession, and that hasn't happened. This is worthy of celebration on all of our parts, but also some reflection on your part.
"What everyone expected was that inflation wouldn't go down unless we had a recession."
This is not true. The Fed doesn't bring inflation down by *causing recessions*. The Fed brings inflation down by *suppressing demand.* The problem is, if you suppress demand too much, you cause a recession. But it is possible to suppress demand enough to bring inflation down without suppressing it too much. That's what a "soft landing" is: getting inflation under control without causing a recession. This isn't some sort of foreign concept.
What people predicting a recession (people like you) were saying was that the Fed was suppressing demand too much, or unnecessarily, and were likely to cause a recession. But it turns out that, so far, anyway, that hasn't been borne out. The economy has remained resilient even in the face of much higher interest rates.
"The Fed began raising rates in the spring of 2022. Following that, nothing happened. Economic growth continued on its normal path."
Come on, you don't really believe there is such a thing as a "normal path" for economic growth, do you?
We have *NO IDEA* what would have happened if the Fed hadn't raised interest rates. We can't go to Earth2 where the Fed didn't raise rates and see what happened. But standard economic theory suggests that demand would have been elevated on Earth2 compared to this Earth. People have been spending more money on interest payments and therefore have less money to buy other things. Businesses' cost of capital has gone up, making them less likely to make investments. Housing sales have fallen precipitously. There was a banking...situation...earlier this year, making credit harder to come by.
How much did any of this matter? I don't know, and neither do you, but it certainly seems likely that SOMETHING would have been different on Earth2. Posting a chart showing 6 quarters of GDP growth post-policy change doesn't prove anything - heck, it's not even suggestive of anything.
"You can't say the Fed got inflation down but had no effect on GDP. This is not how things work. Come on."
You actually *can* say the Fed got inflation down but had no effect on GDP! The basic monetary theory of inflation is that there is more demand than is able to be met by supply, so prices go up. But in that model real GDP doesn't go up, because real GDP is constrained by supply. So if you bring down inflation *just enough*, you can get price growth under control without causing any reduction in real GDP growth - because you bring demand exactly back into line with supply.
This is extremely hard to do! We don't know yet that the Fed has been successful (and celebrating this early is premature!), but so far, the path we're on is consistent with success. It's too soon to declare victory, but it's not too soon to reconsider your assessment of Jay Powell as the worst Fed chair ever in light of your many predictions of recession that have not yet come true.
That's what a "soft landing" is: getting inflation under control without causing a recession.
I won’t argue with your definition, though it’s more a term of econ vernacular than one with a technical definition. But isn’t a “soft landing” a misnomer? The goal of econ policy should be to keep the economy “flying,” though at a sustainable rate. If you bring it in for a landing, that’s bad.
Agree - it always feels weird to me. I think it’s supposed to be price growth that is “landing,” not the economy, but the metaphors that come out of “soft landing” don’t really make much sense.
Should it? The original purpose of the creation of the Fed Bank was to moderate the wild swings of the business cycle.
Can it? Lacking broader regulatory powers beyond the banks, the Fed can't prevent asset bubbles, capital flight, or exogenous events.
"That's what a "soft landing" is: getting inflation under control without causing a recession. This isn't some sort of foreign concept."
Given the Feds inability to do this in the past, it might be a foreign concept.
It seems important to point out that the Fed was predicting that their rate increases would slow GDP growth to near 0 in 2023 while raising unemployment. While youre right that its always theoretically possible to thread the needle perfectly, basic economic theory as you relayed it doesnt do a good job of predicting the future or explaining the past. Given their projections, the Fed clearly thought they would need to dramatically slow GDP in order to slow inflation.
No real disagreement here - things have gone about as well as they could have under the circumstances. And they still could go south. So far we’ve been very fortunate.
I maintain that the Fed deserves credit for navigating things about as well as they could under difficult circumstances, and that their willingness to admit prior error and take drastic action in early 2022 took real courage and fortitude. And so far, it has proven to be a good course of action. Let’s hope that continues!!
Well-written comment. Kudos
<3<3
What people predicting a recession (people like you) were saying was that the Fed was suppressing demand too much, or unnecessarily, and were likely to cause a recession. But it turns out that, so far, anyway, that hasn't been borne out.
It's far from clear Kevin is wrong about a recession. We may well get one. Krugman seems pretty worried along Kevin Drum lines: he believes Fed tightening was unnecessary, didn't work, and therefore by definition has been excessive.
https://www.nytimes.com/2023/12/18/opinion/inflation-economists.html
Common sense should tell you that the Federal Reserve open market committee did not want a recession. If they had, they would have raised their target interest rate a lot farther. Instead they raised it to a level roughly matching the rate of inflation. Now that inflation is going down, interest rate cuts are already on next year's agenda.
What they wanted was a soft landing after the extraordinary GDP growth of 2021, and they got it. To do that, they didn't need to single-handedly smite inflation, but they did need to reassure the financial world that inflation would be curbed.
I'm not certain if this is accurate:
"Second, the Fed and the White House had nothing to do with anything."
From Reuters a few years ago: "To battle inflation, Biden targets supply chains, gas, meat packers" From that article:
"Biden also worked with unions and ports to make operations at the Ports of Los Angeles and Long Beach run 24/7, which has increased goods movement there. He enlisted big retailers, including Walmart (WMT.N) and Target (TGT.N), to move goods faster.
"In addition to some $17 billion earmarked for ports in the recently enacted infrastructure law, the White House announced immediate investments to alleviate congestion at Georgia's Port of Savannah by building five pop-up container yards.
"A shortage of truckers is still causing delays. The Transportation Department expanded hourly work restrictions for drivers on Sept. 1 to support the flow of emergency goods."
No doubt there will be a generation or two (or three) analyzing Biden's response to the pandemic, to the ensuing inflation, to the supply chain problems, etc...
But to say that his admin had nothing to do with anything seems like an extreme end on the spectrum of that analysis.
Hey, it made one hell of a front page line for the media. They need to inform those who don't read and don't know and now they believe minutia that those of us who read and think just laugh at.
You did. We're still waiting for those variable lags, aren't we? And by "we", I mean you.
Bankers, and most notably, Larry Summers.
Yeah, but I don't think that was the issue. The issue was whether or not Fed action would cause a recession. You said it would.
Every once in a while you'll post about productivity. Maybe do one right about now?
Whether or not the US economy tips into a recession certainly isnt the only issue.
The singular focus on blog gotchas (you said X would happen and it didnt!!!) is entertaining, but lets not get carried away and pretend its an important issue let alone the only issue.
Predicting the future is hard. The Fed made equally bad predictions.
Will the economy tip into recession? Eventually. All expansionary business cycles come to an end.
You might recall, however, that in late summer /early fall KD suggested there was still time for the economy to sink into recession this year, pointing to Milton Friedman's variable lags of monetary policy.
It's been 18 months since the start of the Fed rate increases.
I pointed out back then, as I do now, that if people looked at the Beveridge Curve, it signaled an unexpected disconnect between vacancies and the unemployment rate. Therefore, one shouldn't have expect a recession, as the market was showing lots of accommodative room for slowing the economy without actually adversely affecting employment.
IDK, what do you think?
"The singular focus on blog gotchas (you said X would happen and it didnt!!!) is entertaining,.."
It is also useful for other readers.
Kevin is right and those who think that the Fed worked a miracle are wrong. There is still danger of a recession. Here is a supposedly unlocked link to Krugman's latest column for those who want a more authoritative explanation.
https://www.nytimes.com/2023/12/18/opinion/inflation-economists.html?unlocked_article_code=1.HE0.RTfD.Yt98kspGn0mr&smid=url-share
+1
Apparently Kevin's readers don't subscribe to the NY Times or else haven't figured out how to access archived links.
I'll take the counter position:
The fed rate hikes were huge and should have caused a recession by now. GDP growth is much lower than it would have been. Fortunately, Biden's IRA has increased spending on infrastructure, counteracting most of the effect of the rate hikes. And the stimulus during Covid put money where it is most effective giving corporations a reason to continue growing.
Slightly OT. USS (US Steel) is being bought out by a Japanese company. I find it hard to believe (or annoyed is more accurate) that, after bitching to Democrats that the American steel industry needed tariffs to support it and labor, USS ends up literally selling out.
Japanese will run it better and are allies at least.
Apparently John Fetterman feels even more strongly that I do on this: https://www.theguardian.com/us-news/2023/dec/19/john-fetterman-vote-block-us-steel-sale
Nothing against Nippon Steel. This is about the notion of selling out to a foreign company after getting tariffs to help get domestic steel to be price-competitive. USS revealed its true motives.
New single family housing starts: https://fred.stlouisfed.org/graph/?g=1cW1Y