(audience applauding)
- [Narrator] At the Annual Federal Reserve Symposium
in 2022, just a few months after the Federal Reserve
began to raise interest rates to fight inflation,
Chairman Jay Powell was clear
about what those actions might do to the economy.
- While higher interest rates,
slower growth and softer labor market conditions
will bring down inflation,
they will also bring some pain to households and businesses.
These are the unfortunate costs of reducing inflation.
- He didn't mince any words.
He was quite blunt in the fact
that the Fed was willing to take a recession
if that's what it took to derail inflation,
and there was a sense
that that's what they believed was necessary.
- [Narrator] Of course, the Fed is trying for-
- A soft or softish landing.
It's a soft landing with inflation coming down
and unemployment holding steady.
- [Narrator] But by fall,
more than 60% of economists surveyed
by "The Wall Street Journal" including Diane Swonk
predicted a recession in the coming year.
But now, almost a year later, it still hasn't come.
- I am more than happy to eat crow on this one.
When you're wrong and the economy is more resilient,
that's a wonderful thing.
- [Narrator] So where did the recession go?
A recession starts in one of these three areas.
Either people spend less money,
leading businesses to make less money and lay people off,
or they start when people get laid off,
giving them less spending power
and businesses fewer profits.
Or an industry may start to do poorly
and the cycle flows from there.
But all of these areas were strong back in 2022
when the rate hike started, and they still are.
There's a few reasons why.
Let's start with spending.
Simply put, there's a lot of money out there.
People had a lot in savings coming out of the pandemic,
thanks to the stimulus,
and generally just not spending money in 2020,
which meant that when they started spending again,
they had that cash despite inflation.
- We also had the lingering effects of the stimulus,
which ramped up at the state and local level
on infrastructure spending.
- [Narrator] Money is also there
because people still have jobs.
The unemployment rate continues to hold
at pre-pandemic levels.
That reflects two things,
a lower percentage of Americans working or looking for work
thanks to a wave of baby boomer retirements,
and there are still jobs, a lot of jobs.
The number of vacancies is still far higher
than it was pre-pandemic, which also keeps wages growing.
July, 2023 was the first time in two years
where wages grew faster than inflation.
So people were spending money and working
and businesses were in a strong position.
Not only did corporate profits rise,
they had less debt to be affected
by the Fed's rising interest rates.
- Large corporations either locked into low rates
or carried much less debt.
And that's really important
because that also acted as yet another buffer
against higher rates and the implications for employment.
- [Narrator] A major way this cycle is often set off,
especially when the Fed raises interest rates,
is the housing market.
But this one is different.
Normally, when the Fed raises rates,
that increases mortgage rates,
which slows the number of new houses sold,
slowing construction and furnishing
and all the spending and jobs
that come from a robust housing market.
Blue goes up, red goes down,
and usually a recession follows.
But that's not really happening now.
The number of new houses being sold has slowed,
but it was already slowing
thanks to a really limited supply and what happened here.
More than 90% of all homeowners have a rate below 6%.
More than 60% have a rate below 4%.
- It caused what we called a mortgage winter
where people were literally locked in place
because they couldn't afford to now buy a house
at a higher interest rate and much higher prices.
However, they were also hedged
against both inflation and those interest rate hikes.
- [Narrator] Now, here's where we must put in
the disclaimer.
Just because there hasn't been a recession in 2022
or the first half of 2023 doesn't mean there won't be one.
- There are headwinds that are building
that I think are quite substantial.
- [Narrator] Sure, people had money to spend
coming out of the pandemic, but today,
people have way less saved, and they're more in debt.
Economists are still unsure how major Hollywood strikes
will affect unemployment numbers or the economy as a whole.
And don't forget inflation,
which is still not down to the Federal Reserve's target.
Now, most economists still predict a recession,
but fewer of them.
- I am much more optimistic
than I was that we can weather the storm.
I think it's very important that at the press conference,
that Chairman Powell was careful
to not use the word optimism.
- I wouldn't use the term optimism about this yet.
- He said there is a path to a soft landing
and I think there's a wider path to a soft landing
than we once thought.
- It's a long way from a short and, you know,
we have a lot left to go to see that happen.
(intriguing music)