Should the Fed Try to Prevent the Next Recession?

Should the Fed Try to Prevent the Next Recession?
Grace Kaderavek

The U.S. economy is continuing to thrive; the unemployment rate remains low at 3.8% while the CPI is a mere 0.4 (“United States”). This means consumers and producers are confident and our economy is growing. However, many economists are predicting that a recession could strike at any time because of where we are in the business cycle. With “the economy on track to grow at its fastest pace since 2005,” the U.S. is clearly in the expansion phase, also shown on the graph to the right; this means we could potentially hit a peak soon, leading to an eventual downturn (Chokshi). With this possibility in mind, should the Fed begin precautionary measures to prevent a future recession? Or should monetary policy be used only when an economic downturn has actually begun?

The first thing to consider when thinking about preventative measures is that just because we are growing now, does not mean that the growth has to end anytime soon. In fact, Dr. Stevenson, an economics expert, claims that expansionary periods have no time limit and recessions only occur when there is a shock to the economy (Chokshi). Therefore, people may simply be crying wolf when it comes to the idea of a recession in the very near future. This is especially true because “the lowest unemployment rate in 50 years has forced companies to boost wages and benefits” over the last few quarters (Bartash). These increases, in turn, lead to increased consumer spending and continued prosperity in the U.S. economy. None of these indicators, time or consumer confidence, therefore point to the economy being on the brink of a downturn.

Even so, the idea of a recession cannot be entirely discounted. Before the last two recessions the household wealth and income ratio greatly increased, as the numbers became a lot closer. As shown in the graph to the left, the distance between the two curves is currently decreasing steadily, which may point to another recession in the near future; however, it must also be acknowledged that there have been times in the past when the curves intersect and no recession occured, as seen in July of 2005 (Elizald). Therefore, it is difficult to determine how much weight this ratio actually holds in predicting recessions, and if it should be used to justify preventative monetary policy.
When taking all of this into account, it becomes very clear that predicting a recession can be nearly impossible. A New York Times Article discussing the possibility of a recession readily admits that, in general, the Fed and legislators are notoriously bad at determining when an economic downturn will hit (Chokshi). While the two can effectively remedy a recession through monetary and fiscal policy respectively, it is nearly impossible to actually prevent one. This difficulty is not only because of lack of awareness however. Preventing a recession is difficult now especially because interest rates have not reached their pre-Great Recession levels; this means that they cannot, at this point, be significantly lowered to stimulate growth. Additionally, if precautions were put into place, consumer confidence will fall. If U.S. citizens feel as if another recession is on the way, it may actually cause a recession or act as a catalyst for one. This is because consumers, as well as companies, will act according to future expectations; therefore, undertaking expansionary policy may be the worst choice for the government or the Fed to make at this point in the business cycle.

Taking all of this into account, I do not believe it is in the economy’s best interest to use preventative monetary or fiscal policy. Once a recession does hit, it is then the Fed’s and the government’s responsibility to step in; until then, the U.S. should continue to enjoy its economic boom without worrying about a downturn that could occur in a matter of months or years.

Watch this video for more information about the next U.S. recession, and when the experts predict it will happen.

Works Cited

Bartash, Jeffry. “Economy Stumbled out of the Gate in Early 2019 but Finished Stronger, GDP to Show.” MarketWatch, 22 Apr. 2019, www.marketwatch.com/story/the-us-economy-wasnt-so-bad-in-the-first-quarter-after-all-gdp-likely-to-show-2019-04-22.

Chokshi, Niraj. “What Is a Recession, and Why Are People Talking About the Next One?” The New York Times, The New York Times, 17 Dec. 2018, www.nytimes.com/2018/12/17/business/economy/what-is-recession-facts-history.html.

Elizalde, Raul. “Another Warning That A 2019 Recession Is Coming.” Forbes, Forbes Magazine, 18 Dec. 2018, www.forbes.com/sites/raulelizalde/2018/12/17/another-warning-that-a-2019-recession-is-coming/#7124694ed8f3.

“United States Economy at a Glance.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, www.bls.gov/eag/eag.us.htm.