Over the past two years, most economists have predicted a US recession. Indeed, it has been the most widely anticipated recession that didn’t happen. Like Godot, it has been a no-show.
That became increasingly obvious at the start of this year. However, while most bailed on their gloomy recession forecasts, many predicted that the Federal Reserve would have to cut interest rates several times to avoid a recession if inflation continued to moderate. That prediction also looks to be wrong, and more economists are now talking about a “higher-for-longer” interest rate outlook.
It was logical to expect a recession over the past two years. After all, the Fed raised the federal funds rate by 5.25 percentage points between March 2022 and July 2023. Surely, it seemed, such a significant tightening of monetary policy would cause something to break in the financial system, unleashing a credit crunch that would then cause a recession. When that happened, the Fed would be forced to lower interest rates quickly. This was the modus operandi of most of the monetary policy cycles since the 1960s.