U.S. recession fears exaggerated, economists at Jackson Hole say

By Greg Robb

Fed seen cutting interest rates two or three times this year and then pausing

The U.S. economy is not expected to fall into recession, experts attending the Federal Reserve's summer retreat at the base of the Grand Teton Mountains in Wyoming say.

"The underpinnings of the economy look good. Broadly speaking, things look pretty solid," said Karen Dynan, an economics professor at Harvard University.

"When we enter the typical recession, there is usually some underlying weakness. It just doesn't feel that way now," she added.

Worries about a recession have risen since early August after weak July jobs data which showed labor-market demand has softened, with "hints of slowing labor income gains and rising layoffs," said Michael Feroli, chief U.S. economist at JPMorgan Chase, in a note to clients.

Analysts at the Jackson Hole, Wyo., meeting said that they were watching the labor market closely, but the softness so far suggests a slowdown - not a downturn.

The unemployment rate has moved up from a low of 3.4% in April 2023 to 4.3% in July.

"You have to slow the airplane down to get a soft landing," said former Fed Vice-Chair Alan Blinder, in an interview at Jackson Hole. He said the chances of a recession are not much higher than the 15% that always exists.

In the past, such a increase in the unemployment rate has often portended a recession, but this time is different, Dynan said.

Dynan said the substantial wave of immigration over the past few years has pushed up the unemployment rate because the new arrivals are looking for work.

"I know there are people who believe that once you see a certain percentage-point rise in the unemployment rate then you're probably going into a recession, but it is not really clear that that rule of thumb holds right now," Dynan said.

The Fed's staff forecast is that the unemployment rate is expected to edge up slightly over the remainder of 2024 and then remain roughly unchanged in 2025 and 2026, according to minutes of the central bank's July meeting released last week.

In an interview, former Kansas City Fed President Esther George said that she was also not worried about a recession.

"I haven't taken as much signal from the labor market as some have," George said. "I think the labor market needed to ease up compared to where we were," she said. "Once the unemployment rate starts ticking up, it can gain its own momentum. Right now it looks OK."

"The consumer, so far, has held up," George added.

Fed Chair Jerome Powell used his speech Friday to say "the time has come" for an interest-rate cut in September. It would be the first cut in four years.

Powell did not discuss the size of the likely monetary-easing move. Most experts at Jackson Hole expect a 25-basis-point move in the federal funds rate. A weak August unemployment report, to be released on Sept. 6, might sway the central bankers to cut by 50 basis points.

See also: Fed chief Powell signals at Jackson Hole that weak August jobs data would punch ticket to half-point rate cut

However, the bond market reflects a worry about a recession. Traders in derivative markets have priced in some risk if the Fed cuts interest rates significantly to cushion the economy.

Another former Kansas City Fed president, Thomas Hoenig, said he didn't like the "one-way bet" in the bond market. He said there was a risk that inflation might pick up again.

"Recession is always a possibility but right now things are pretty steady. There is no necessary outcome that we have a recession," he added. Rapid rate cuts could invite inflation back up, he said.

Economists at Jackson Hole think the Fed will cut rates gradually. The next big question is how low rates may go.

George said the Fed could do two or three quarter-point rate cuts this year before pausing to recalibrate.

"I'd take a few cuts and then I'd look around and see," she said.

Blinder said he wouldn't be surprised if some of the Fed's cuts could be "of the 50-basis-point variety."

The Fed's benchmark rate stands at 5.25%-5.5%.

If economy is steady - with inflation at 2% and the economy growing by about 2% - the Fed thinks that the benchmark rate should be at 2.8%.

See also: Powell says time has come for rate cuts. Here's the opportunity for investors.

-Greg Robb

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08-25-24 1801ET

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