Fed officials have made clear they’re willing to tip the economy into a recession if necessary to defeat high inflation, and most economists believe them.
So what is the likelihood of a recession? Here are some questions and answers:
Why are economists fearing a recession?
They expect the Fed’s aggressive rate hikes and high inflation to overwhelm consumers and businesses, forcing them to significantly slow their spending and investment. Businesses will likely also have to cut jobs, causing spending to fall further.
Consumers have so far proved resilient in the face of higher rates and rising prices. Still, there are signs that their sturdiness is starting to crack.
What would be the initial signs of a recession setting in?
Many economists monitor the number of people who seek unemployment benefits each week, a gauge that indicates whether layoffs are worsening. Weekly applications for jobless aid have been creeping higher as a range of companies, from Facebook’s parent company Meta to the industrial conglomerate 3M to the ride-hailing company Lyft, have announced layoffs.
Any other signals to watch for?
Economists monitor changes in the interest payments, or yields, on different bonds for a recession signal known as an “inverted yield curve.” This occurs when the yield on the 10-year Treasury falls below the yield on a short-term Treasury, like the three-month T-bill. That is unusual. Normally, longer-term bonds pay investors a richer yield in exchange for tying up their money for a longer period.
Who decides when a recession has started?
Recessions are officially declared by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Does high inflation typically lead to a recession?
Not always. But when inflation gets as high as it did last year — it reached a 40-year peak of 9.1% in June — a recession becomes increasingly likely.