Predicting when the next recession will hit is as much art as science. Economists, financial analysts, bloggers—frankly, all those who have an incentive being the first to call a recession—are at risk at having their judgment affected by these incentives.
An analysis of post-World War II recessions and their causes, studied after the fact, indicate that certain changes in monetary policy in the form of interest rate changes ordered by the Federal Reserve are the best way to predict a recession. When the Federal Reserve is concerned that inflation is rising, it raises interest rates as a way to slow down economic activity and half inflation. There is a tendency by the Fed to overshoot this attempt at stopping inflation, which leads to recession.
The good news is that the Federal Reserve does not see inflation as a threat at the moment, which means they won’t try to stop it by raising interest rates and thus will avoid overshooting and causing a recession.
Read the full article at Calculated Risk Blog.
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