Economist: Despite mixed Fed signals, recession increasingly unlikely

University of Arkansas Walton College economist Mervin Jebaraj has been parsing through the Federal Reserve Bank’s statement on economic conditions from last week. The signals are mixed, but he thinks a recession unlikely in large part due to the debt ceiling resolution.

Jebaraj, who appeared on this week’s edition of Talk Business & Politics, said the Feds holding interest rates unchanged, but warning that two more rate hikes would be coming, caused confusion in the markets.

“We widely expected them to not raise interest rates this time, and we widely expected them to signal maybe one more interest rate increase at some point this summer. So I think most people’s expectations were no increase in June, one increase in July,” he said. “So the surprising thing in all of this was that while they didn’t particularly put this in any of their statements, they indicated that they’re pausing. They’re going to be very data driven and see what the data says before their next meeting.”

“I think the confusion is that if they want two more rate increases, why didn’t they do one this time and one in July? If indeed the economy needs two more rate increases, why not raise now and get inflation under control? Why wait until July and then at some point after that? What are they seeing about the future path of inflation that we’re not seeing?” he added.

New inflation numbers released this week show it is cooling in the U.S. Just under 4%, it is still not where the Federal Reserve Bank would prefer – in the 2% range – but it has come down significantly from year-ago levels.

“My guess is that the Federal Reserve is trying to have its cake and eat it too, just trying to signal that they’re pausing, but indicate that they fully well might increase two more times, rather than one more time. They’re trying to take inflation very seriously, but not tell the markets that, ‘Oh, that’s it. We’re not raising rates anymore,’” said Jebaraj.

While interest rates attempt to tame inflation, while guarding against a recession, the Walton College economist said an even bigger factor that may help the U.S. economy avoid a recession was the resolution of the debt ceiling debate. A bipartisan group of federal lawmakers and President Joe Biden hammered out a deal to increase the debt ceiling and avoid wrestling with it again until after the 2024 elections.

“I think one of the big dark clouds in the horizon was obviously the debt ceiling debate, and I think if that had not been resolved in a timely manner, which it was thankfully, and had it dragged on for awhile, there was a very strong possibility that the economic consequences of not raising the debt ceiling would have been enough to push the U.S. into a recession this summer,” he said.

“I think given the momentum that we see in employment growth in the United States, given the fact that the Federal Reserve for now anyway has paused raising rates and the unemployment rate being as low as it is, I think there’s a very strong possibility now, assuming nothing else changes, that the U.S. avoids a recession at least through to the end of this year,” Jebaraj said.

You can watch Jebaraj’s full interview in the video below.