EconExtra: The Elusive “Soft Landing” and Potential for Recession
EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons.
The Headline Issue
In spite of all the positive economic news we have seen of late (apart from inflation), the past week saw headlines with the “r” word (recession). Why are some economists predicting an impending recession, when employment has largely recovered from the pandemic hit, unemployment is back down to pre-pandemic levels, new unemployment claims are the lowest we’ve seen in decades, and growth of GDP is back up? In a word, booming inflation is the reason.
Demand for many goods and services has outpaced supply and driven prices up at rates not seen in 40 years. Pandemic-related labor shortages and supply chain issues got us into this mess, and now the war is adding more uncertainty to the whole picture. Economists have stated that perhaps if the Fed had acted sooner to tighten monetary policy, a “soft landing” might have been possible, but at this point, they feel the Fed will have to really slam on the brakes, which is likely to slow the economy down in the process.
There are two articles students can read to understand economists’ thinking on this subject:
- This CNN article: “Deutche Bank is the first big bank to forecast US inflation,” gives a good introduction.
- This article from the NYT: “The U.S. economy is booming. So why are economists worrying about recession?” offers a more detailed discussion, taking the reader through the arguments on both sides of the issue.
Have students read both articles and answer the following questions.
- How exactly might tighter monetary policy lead to a recession, given the position the economy was in when the policy changes started? Try creating a flow chart of the steps or actions/reactions that would lead to a recession.
- Has the Federal Reserve tightened monetary policy in the past without causing a recession?
- What other (global) factors are making the Fed’s task more difficult this time around?
- What are the arguments given in support of the position that a recession is UNLIKELY, at least in the near-term?
- Which side of the debate would you take, and why?