Today, the economy seems to run on pins and needles.
Stocks are crashing, investors are nervous and voices keep murmuring that a recession is on the way.
Things are looking bad right now, but one economist refuses to get carried away with fears of the worst-case scenario — saying two key factors indicate a recession is far from certain.
In an interview on Wednesday with the Harvard GazetteJason Furman, a Harvard professor and former economic adviser to the president under Barack Obama, said current market volatility is an unavoidable function of the Federal Reserve’s policy of raising interest rates to combat US inflation.
Furman is not surprised that the stock market is behaving so erratically at the moment and suggests that it may have even been unavoidable.
“One thing that runs throughout the economy is interest rates,” he said. “As interest rates rise, it becomes more attractive for investors to move their money into bonds and out of stocks, which causes stocks to fall.”
President Biden has made it clear that a top domestic priority is to reduce inflation in the country, which was 8.3% according to the latest reading. To do this, the Federal Reserve has been gradually raising interest rates since March, a move that would certainly have some repercussions on the stock market.
Furman said other factors, such as COVID lockdowns in China affecting manufacturing, have seriously hurt stock indices, especially the tech-heavy Nasdaq. But there’s still only “one story that runs through everything — and that’s interest rates.”
But that does not mean that higher interest rates do not entail any risk for the economy. The Fed’s attempts to get out of inflation could end in one of two ways: a soft landing for the economy — in which inflation falls without a significant drop in economic activity or a massive rise in unemployment — or a hard landing, also known as an economic crash.
The saving grace of the economy
Fortunately for the economy, Furman said two factors appear to be in favor of a soft landing: consumer activity and gasoline prices.
Despite higher prices across the economy, consumer activity has remained strong this year, mainly due to the large amount of savings that US buyers have amassed during the pandemic. Whether US consumers will be able to keep buying through the storm of inflation will be a key factor in whether or not a recession occurs, Furman said.
“I’m relatively unconcerned about a recession in the coming year as consumer spending has remained very strong and consumers have about $2.3 trillion in excess savings that they accumulated during the pandemic that could be added to in the coming years. issued,” Furman said.
The idea that US consumer power can save the economy from recession is based on the country’s low unemployment rate and large savings from the pandemic era, and Furman is not alone in taking this view.
Investment bank Goldman Sachs has found a similar silver lining, recently assuring investors that while the risk of a recession is mounting, “the financial health of the private sector may ultimately determine whether policy tightening will send the economy into a downturn. “
But even if consumer spending doesn’t stay high enough to stave off a recession, Furman sees a key contributing factor to inflation starting to stabilize: gasoline prices.
“If you want to ask how much inflation we’re going to have going forward, you want to take out volatile things like oil prices and gas prices because they’ve gone up really high and they’re probably going to fall,” Furman said.
Thursday’s national average for gas prices was $4.41, more than a dollar higher than a year ago. But the world’s producers have been working hard to pump up more supplies to cool prices, including Biden’s plan to pull a record 1 million barrels of oil a day from the country’s strategic reserve. .
“The good news is that some of the inflation is likely to level off or fall,” Furman said, referring to the impact of high gas prices on inflation.
“Even if headline inflation is high, the part of inflation people notice the most should get better. There is very little reason for them to continue rising as they have,” he added.
This story was originally on Fortune.com