Cooling inflation has helped temper concerns of an imminent recession, particularly as the job market continues to show historic strength, but a worsening housing market collapse and vast uncertainty over the course of the Federal Reserve’s interest hikes have many experts, including policy officials, warning that it’s still too early to know just how difficult this economic downturn will end up being.
“It does not feel like a recession now,” Minneapolis Fed President Neel Kashkari, one of the 12 central bankers who vote on changes to Fed policy, said in a public appearance on Thursday, noting that the labor market remains very strong, wages are rising and consumer demand remains resilient.
Though acknowledging the economy’s strength, which comes as inflation begins to show signs of slowing, Kashkari was also cautious, asking, “…can we continue to bring inflation down without triggering a recession?” and then answering, “I don’t know.”
He noted the Fed needs to temper still-high inflation “urgently” and pledged to continue hiking interest rates to help cool demand, and then warned the economy will “continue to slow as officials continue raising rates, making a recession more likely.”
The cautious statements came after home builders and realtors declared a recession in the housing market this week, as higher home prices and mortgage rates continued to sideline potential buyers and push demand to the lowest level since the turn of the century.
The Atlanta Fed cut its projections for third-quarter economic growth from 2.5% to 1.8% on Tuesday after data showing housing starts unexpectedly plunged 9.6% last month to the lowest level in more than a year, with experts blaming the worsening sentiment on rising mortgage rates.
Economists at Goldman Sachs are also worried it will be difficult to avoid a recession as the Fed works to combat inflation, saying on Tuesday that officials are “off to a good start but [have] a long way to go”; on Monday, Moody’s Analytics put the odds of a recession over the next year at 50%.
Higher interest rates are having a brutal effect on the housing market, driving up the cost of home-buying by hundreds of dollars each month and pummeling demand as a result. Existing home sales have plunged nearly 30% from a January high. Meanwhile, home prices are still skyrocketing and making affordability even worse. “We’re witnessing a housing recession in terms of declining home sales and home building; however, it’s not a recession in home prices,” National Association of Realtors economist Lawrence Yun said Thursday, noting the median existing home price has fallen to $403,800 from a record high in June but is still up nearly 11% from one year ago.
Consumer prices rose 8.5% in the 12 months ending in July—slowing down for the first time in months and fueling hopes the Fed’s efforts to cool inflation may finally be working. After an unprecedented surge in gas prices, inflation hit a 40-year high of 9.1% in June.
The Fed raised interest rates by another 75 basis points at its latest policy meeting in July, as officials discussed “unacceptably high inflation” and acknowledged economic growth will be “noticeably weaker” than they believed one month ago. Thus far, the central bank has hiked interest rates by 2.25 percentage points this year. Goldman says the majority of hikes are behind us in this tightening cycle and predicts only a 50-basis-point rate hike in September and 25-basis-point increases in November and December. However, that’s contingent on inflation coming down.
After a blockbuster jobs report, which showed the economy added more than half a million jobs in July, unemployment claims fell again this week, reflecting ongoing strength in the labor market despite waves of layoffs among some giant corporations. Average hourly wages, meanwhile, have jumped more than expected, climbing 5% in July to $32.27—the highest on record. “Any loosening in the labor market is marginal,” says Pantheon Macro chief economist Ian Shepherdson, citing the better-than-expected data. “There’s no recession here.”
Stocks have struggled to find direction after rallying more than 15% since the Fed’s rate hike in June when many investors concluded the worst of the increases may be over. However, the S&P 500 is still down 12% this year, compared to a 21% gain in 2021. Bank of America has warned slower-than-expected economic growth could tank stocks further, and if inflation isn’t tamed, more aggressive Fed policy would surely rock markets again.