Published On Jun 15, 2022
America has experienced at least 30 recessions throughout history, dating back as early as 1857. Some experts believe that they have become an inevitable part of the economic cycle that fluctuates between periods of expansion and contraction. Nonetheless, certain measures can still be taken to make recessions less likely. As the nation’s authority on monetary policies, the Federal Reserve plays a critical role in managing recessions. So why do recessions happen and what can the Fed do about it? Watch the video to find out.
The U.S. has experienced at least 30 recessions throughout history, dating back as early as 1857.
Some economists argue that they may have become an inevitable part of the financial cycle that fluctuates between periods of expansion and contraction.
“History teaches us that recessions are inevitable,” said David Wessel, a senior fellow in economic studies at The Brookings Institution. “I think there are things we can do with a policy that makes recessions less likely or when they occur, less severe. We’ve learned a lot, but we haven’t learned enough to say that we’re never going to have another recession.”
As the nation’s authority on monetary policies, the Federal Reserve plays a critical role in managing recessions.
The Fed is currently attempting to avoid a recession by engineering what’s known as a “soft landing,” in which incremental interest rate hikes are used to curb inflation without pushing the economy into recession.
“What they’re trying to do is raise rates enough so demand slows,” said Jason Snipe, chief investment officer at Odyssey Capital Advisors.
But a successful soft landing is extremely rare as the monetary policy needed to slow down the economy is often enforced too late to make any meaningful impact.
It was arguably achieved just once, in 1994, thanks to the Fed’s more proactive response to inflation and good timing.
″[It’s] really, really difficult to get into that really, really narrow zone,” said Stephen Miran, former senior advisor at the U.S. Department of Treasury. “It’s the difference between trying to land an airplane in a really wide and spacious open field versus trying to land an airplane on a very, very narrow piece of land with rocks and water on either side.”
Some experts also argue that policies have a limitation on what they can achieve against an impending downturn.
“Policy tends to operate with long lags, which means the ability to effect immediate change in the economy is quite slow. I also think that increasingly we live in a global economy where the cross-currents that are impacting the economic dynamics are very complex,” said Lisa Shalett, chief investment officer, wealth management at Morgan Stanley.
“These are dynamics that the Fed doesn’t have the tools to address and so to a certain extent, we do think that policymakers have certainly developed more tools to fight recessions,” she said. “But we don’t think that you can rely on policymakers to prevent recessions”
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Why Recessions May Be Inevitable