It would land another blow on vulnerable parts of the global economy and, closer to home, on Wall Street. If something goes wrong, the Federal Reserve will find it hard to rescue the system again
, with nearly two job openings for every unemployed worker in March, the most since 1950, when data were first collected. A measure of wage growth by Goldman Sachs is at an all-time high of nearly 5.5%—a rate companies cannot bear unless they continue to raise prices fast.by more than 2.5 percentage points by the end of 2022. The central bank is crossing its fingers, saying that it can hit its 2% inflation target without causing a downturn.
The trouble is that even a mild American recession would expose glaring fragilities. One is the commodity-price crisis in much of the world, the result of Russia’s invasion of Ukraine. Countries from the Middle East to Asia are facing severe food shortages and soaring fuel bills. The euro zone is dealing with an especially sharp energy shock as it weans itself off Russian oil and gas. Around the world, household incomes are collapsing in real terms.
An American recession would land another blow on vulnerable parts of the global economy by curbing demand for their exports. Tighter monetary policy at the Fed and the resulting strength of the dollar would also compound what has already been the biggest sell-off in emerging-market bonds since 1994. TheAnother weakness lies closer to home, on Wall Street. So far in 2022 the American stockmarket has fallen by 15%—comparable to the decline during the mild recession that started in 1991.
A system of market-based lending has sprung up since 2007-09 that has yet to be severely tested. It includes investment funds that act like banks, vast derivatives clearing-houses and high-speed bond traders. If something goes wrong, the Fed will find it hard to bail out Wall Street yet again, because it will at the same time be forcing Main Street to cope with higher rates and job losses..
Politics could distort the government’s response to a recession. The Fed may be dragged into a venomous political battle. After receiving handouts amounting to 26% ofin the pandemic, voters and firms may expect the state to protect them from hardship this time, too. Yet the Republicans, who will probably control Congress after mid-term elections in November, would be most unlikely to spend money to see off a downturn if that also risked saving President Joe Biden.
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