Is the US in a recession? Hear what Jerome Powell thinks

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New York (CNN Business)For the second month in a row, the Federal Reserve raised interest rates aggressively, by three-quarters of a percentage point. That’s pretty much what everyone, including Wall Street, expected to happen. But it’s still a pretty big deal, and would have been downright unfathomable six months ago.

Here’s the thing: Fed policy meetings aren’t exactly riveting TV. But in this moment, when a fraction of a percentage point could mean the difference between crashing into a recession and gently cruising into the economic equivalent of 70-degrees-and-sunny, pretty much everything Chairman Jay Powell says is being dissected and held against the light.
Didn’t tune in? Lucky for you I had nothing better to do and am, well, kind of a note-taking nerd. Here’s what you need to know.

1. What the Fed’s doing: Utilizing the most powerful tool it possesses — interest rates — to slow the economy down in the hopes of taking the heat off consumer prices. Inflation is hovering rather stubbornly at 40-year-highs, thanks to a variety of factors including the Fed’s own pandemic-era policies, which arguably avoided a bigger financial disaster but also definitely helped create the inflation it’s now fighting.

2. Why now: A lot of Fed critics would say the central bank has a credibility problem after it spent the majority of 2021 downplaying the inflation risk. Now, it’s playing catch-up to try to tame the inflation its own policies helped create in the first place.

2(a).The modern Fed has a tendency to back itself into a corner by constantly projecting its rate decisions to appease Wall Street. If it wants to change its mind, it risks scaring the crap out of investors who are notoriously allergic to surprises. Jittery bunch, those finance types.
2(b). The Fed is independent and typically doesn’t sully itself with politics, and that’s important to its credibility. If it changes tack now, it could be read as a political decision. It’s got to pretend it’s not aware Midterms are just a few months away.

3. Why three-quarters of a point? Why not a full point? Or a half?
This is uncharted territory for the bank, and it’s trying to avoid doing too much too fast.
In the last 30ish years, the Fed has nudged its benchmark interest rate up or down by an average of a quarter of a percentage point, aka 25 basis points. But last month it went up to 75 basis points, and then another 75 today. It’s never done two back-to-back raises at that level, which signals how serious it is about tackling inflation.
4. Inflation sucks, but wouldn’t a recession suck more?
This is the central question at the heart of raging monetary policy debates right now. And opinions are falling along predictably partisan lines.
Left-ish and progressive economists say the answer is clear: A recession would be SO much worse than the inflation we’re living though now.
More conservative thinkers scoff and remind you how terrible the 1970s inflationary spiral was and how it took two painful recessions to correct it. Let’s just rip the band-aid off and get prices back where they belong, the thinking goes.
Powell displayed ninja-like evasive skills to avoid getting pinned down on the recession-vs-inflation debate.
Asked one reporter: “If you’re going make a mistake, would you rather make a mistake on raising too much or too little?”
JP: “We’re trying not to make a mistake,” he said. But the risk of doing too little and allowing inflation to become entrenched “only raises the cost of dealing with it later.”
Translation: Powell’s saying a recession is worth the risk. And that’s made him some enemies on the left, such as Sen. Elizabeth Warren, who went off in a Wall Street Journal op-ed earlier this week, calling Powell’s plan a “painful and ineffective inflation cure.”
Warren’s got a point. In the last 11 tightening cycles, the Fed has only successfully avoided recession three times, my colleague Nicole Goodkind reports. During each of those cycles, inflation was lower than it is today.
Even analysts at BlackRock (who are presumably not a bunch of Bernie Bros) said, “we think a soft landing is unlikely.”
BOTTOM LINE
Jay-P left the door open for an even bigger rate hike at the next meeting, and that seemed to make Wall Street happy as US stocks surged on the news. But it will all depend on the data, including GDP data due out tomorrow and inflation data due out Friday.
The question now is: Can the Fed remove the punch bowl without killing the party? There are as many opinions about that as there are analysts. But doubters are certainly beginning to drown out the optimists.

NUMBER OF THE DAY: $280 billion

The US Senate advanced a massive bill that would direct public money toward fostering a stronger domestic semiconductor industry — a rare bipartisan vote that advances a key priority of the Biden administration.
The $280 billion bill, known as CHIPS, provides financial incentives to companies that build plants in the United States, and expands funding for research in a range of technologies that lawmakers view as vital to the country’s commercial and military prowess.

WAIT, WHAT?

In today’s episode of “Headlines That I Thought Were Satire But Are Shockingly Real:” Senator Joe Manchin just agreed to back legislation that would raise taxes on rich people and invest in fighting climate change.
Again, this is Joe Manchin, the guy who has single-handedly scuttled his party’s signature legislation tackling health care, climate change and taxes.
Needless to say, this is a big reversal from the Democrat from West Virginia. Like, less two weeks ago, he said he couldn’t back the things he’s now backing because of inflation concerns.
It wasn’t immediately clear what made him change his mind.
We don’t know all of the particulars of the bill, but here’s what we do know, courtesy of my colleague Manu Raju:

• The plan includes $369 billion for energy and climate change programs, with the goal of reducing carbon emissions by 40% by 2030.
• For the first time, Medicare would be empowered to negotiate drug prices, something Democrats say would raise $288 billion, and it would cap out-of-pocket costs at $2,000 for drugs.
• To raise revenue, the bill would impose a 15% corporate minimum tax, while raising taxes on carried interest, and raising another $124 billion through IRS tax enforcement. Families making less than $400,000 per year would not be affected.
• Democrats say it would reduce the deficit by $300 billion.

Obviously, the GOP is going to fight it, but the bill stands a serious chance of becoming law as soon as August, Manu writes, assuming Democrats can get it through the House that it passes muster with the Senate parliamentarian to allow it to be approved along straight party lines in the budget process.
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