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NextImg:Will high interest rates and a weakening economy deliver a recession? - Washington Examiner

With the unemployment rate jumping to 4.3% and November’s election outcome hanging in the balance, many eyes are focused on the Federal Reserve’s July decision not to cut interest rates. Let’s take a look at where it all stands.

The Fed’s decision was accompanied by a strong promise that a cut would likely be delivered at its September meeting. And that promise was understandably greeted with smiles by Democrats seeking office and frowns by Republicans who say a cut now is bad policy.

But the Fed has reason to be cutting. Data show that the inflation rate has fallen to 2.6%, getting closer to the 2% target. The unemployment rate, up from 3.5% a year ago, has risen for four successive months. Looking at other data, such as manufacturing output, housing starts, and home sales, it’s clear the U.S. economy is in a serious state of decline.

Of course, this is just what the Fed expected to see when the decision was made to fight inflation by raising interest rates. There’s no such thing as free inflation elimination.

Putting election year politics to one side and just focusing on the economy, does the slowdown and Fed’s decision to keep its foot on the interest-rate brakes for longer raise the prospect of a pending recession? If so, will a September softening of policy help remove the recessionary prospect?

There are two things to consider. First are gross domestic product growth forecasts from respected organizations covering the next four quarters. The most recent from the Wall Street Journal economists panel, the Federal Reserve Bank of Philadelphia panel, and Wells Fargo Economics show low, but greater than 1%, real GDP growth for each of the next four quarters. There is no recession in those forecasts.

Next is money supply growth and how that important Fed-controlled activity might generate a recession. Generally speaking, this growth, captured, for example, by the M2 measurement, generates a real-economy response 12 to 18 months later.

The Fed first hit the brakes to slow the economy in February 2021 and sharply reduced money supply growth until April 2024. This suggests we will see a slowing economy, just as the three forecasters predicted for the next four quarters.

Will a September interest rate cut make any difference? No, I think not. The cookies defining next year’s economy are already in the oven.

If you want to look on the bright side, the evidence does not point to two consecutive quarters of negative real GDP growth, or a recession, in the next 12 months. But we will see a continually slowing economy.

CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER

That said, we must not forget that this is what’s called “crazy season,” when politicians seeking office say and promise almost anything to get elected. If some of those crazy promises are delivered in early 2025, another economy, maybe stronger or weaker, could emerge.

Keep your seatbelts fastened.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson College of Business and Behavioral Sciences.