Recession IMMINENT? Economic Downturn Expected By Oct 2023. Housing Prices DROP, Mortgage Rates SOAR

[00:00:00] Speaker 1: New Bloomberg economic model projections are predicting a recession is certain in the next 12 months. The latest models show a 12-month estimate of a downturn by October 2023, hitting 100%, up from 65% for the comparable period in the previous update. [00:00:17] Speaker 2: This directly contradicts President Biden's statement that the U.S. will not face a recession and any downturn would be, quote, very slight. Finance reporter at The Hill, Sylvan Lane, joins us now to expand on this. Welcome, Sylvan. Thanks for having me. So what economic signs are you seeing that recession is now moving into the all-but-certain kind of category? [00:00:41] Sylvan Lane: Certainly. So it seems a little bit weird to be talking about recession in an economy where we've added 420,000 jobs on average per month, and the unemployment rate is still really low at 3.5%. But the problem is that inflation has been getting higher, and it's continuing to run hot, and it's been like this for more than a year. That means the Federal Reserve is under pressure to keep raising interest rates. And as those interest rates get higher, the economy will slow, unemployment will increase, inflation may come down, but it may be at the cost of starting a recession. [00:01:18] Speaker 1: So it sounds like what you're saying then, that the recession is being driven by the choice to raise interest rates in order to bring down inflation. But this is a kind of a cyclical pattern that some people, especially on the left, have been challenging. And the idea that that is the Fed, when all you have is a hammer, everything looks like a nail, is using raising interest rates instead of addressing some of the underlying causes of inflation. Does that resonate with you at all? Are there any other approaches that could be taken other than kind of purposefully creating an economic downturn that's going to disproportionately hurt the poorest and most working-class people in the country? [00:01:58] Sylvan Lane: So you're definitely right to point out that a lot of what's causing inflation, or at least a decent amount of it, is beyond the Fed's control. The Fed can raise and lower interest rates, along with a few other tools it has, to basically make money harder to get and more expensive to borrow. But that only affects some causes of inflation. Now, the issue is the Fed is under a legal mandate from Congress and the President to do whatever it can to bring inflation down. But because it can't touch certain aspects of inflation, all it can really do is keep raising interest rates on its own until it gets to a point where they think inflation is on its way down. The other side of it, when it comes to dealing with supply-related issues, getting more workers back into the workforce, dealing with some of the corporate decision-making that may be causing prices to go higher, all of that stuff is beyond the Federal Reserve's control. But the Fed is still bound by their legal mandate to keep prices stable. So they're in the spot where they feel like they can either drive the economy into a slowdown to bring inflation down, or ignore what their job is and allow prices to keep rising higher. And then we end up, by their argument, in a much worse situation than if they didn't raise interest rates at all. [00:03:16] Speaker 2: Well, home sellers are dropping their asking prices at record rates as mortgage rates surge. According to Redfin, about 7.9% of home listings reported price drops during the four-week period that ended October 9th. So this is one aspect of all this that, I don't know, this would come as relief, perhaps, to buyers. We talk a lot about the out-of-control, ever-increasing housing prices, making it hard for first-time home buyers, not hard for a lot of people. It's worse in some areas of the country than others. This is bad news, you know, if you own a house currently, but you would still expect in the long run some of that value to come back. So how does a drop in housing prices, you know, affect kind of the economic situation? Because I could actually see how that would be good for some people. [00:04:11] Sylvan Lane: Yeah, no. So basically, when the Fed raises interest rates, it makes mortgage payments more expensive, because mortgage rates move basically in lockstep almost with when the Federal Reserve raises its baseline interest rate range. Now, that's a really complicated process that I could spend hours getting into. But the bottom line is, when the Fed raises rates, it makes mortgages a lot more expensive. So to compensate, people who are selling houses are going to lower their housing prices. Now, the Fed hopes that all of this will lower inflation, not just because houses are getting less expensive, but because when people buy houses, they also buy a lot of stuff to go in that house and a lot of services to put things in that house. Movers, renovators, furniture, all of that stuff. The Fed is hoping that fewer home sales and home purchases means fewer or less money going into the economy, which should hopefully bring inflation down. Now, the problem is housing prices are still really high by historic standards. Mortgage rates are high, too, and the fact that so many people can't afford to buy houses now is pushing more people into apartments where they're staying longer and landlords are jacking up the rents there. So the Fed is at the beginning of a process that it hopes will reduce inflation, but there's a lot of things that are kind of beyond its control that might get in the way of that, too. [00:05:34] Speaker 1: So we've seen in the UK, for example, a choice to cap energy prices. Conversations about price caps on goods in the United States are treated very negatively and aren't really in the realm of a political discourse and haven't been since the 1970s when Nixon implemented price caps that were actually very popular. I find myself bringing this up because it does seem like the approach, which is to create a recession, that, again, is going to disproportionately affect the poorest people in the country, a choice made by people who are kind of professional, bad decision makers, in my view, like Larry Summers, does seem to be a response that is driven by a lack of imagination or perhaps political courage to take other kinds of approaches. Is it really true that the only thing to do in this moment is to raise interest rates? Is there not another way to address the fundamental issue, which in many contexts seems to be the supply issue? [00:06:34] Sylvan Lane: There's certainly. I mean, so raising interest rates is not the only thing that can be done. It's one of the only things the Federal Reserve can do. But to understand why there hasn't been more collaboration, we have to get back to what President Biden said earlier this year when he launched his grand plan to fight inflation. For him, the number one pillar of that plan was letting the Fed do whatever it felt it needed to do to fight inflation. Now, Biden was a senator in the 70s when inflation was at double-digit levels, largely because several presidents over time and Fed chairman who didn't have the courage to do so allowed it to run up instead of raising interest rates at a time where it really made sense to do that. Biden really wants to avoid a situation that faced Jimmy Carter and the one that, you know, ended up causing a recession during Ronald Reagan's first term, which is putting the Fed in a position where it needs to jack up interest rates like crazy. So that's where Biden is coming from here. The problem is he and the Democrats in Congress have tried to do things, you know, with the Inflation Reduction Act, releasing more oil reserves to try to, you know, lower the inflationary pressure. But as you mentioned, price caps have a very negative political legacy. You know, people think of the long lines spanning from gas stations, all of this stuff that kind of defined Carter's presidency and led to his downfall in that election. Biden is probably looking at a lot of these similar political currents and wants to make sure he's not repeating the same mistakes that cost his party when he started his senatorial career, you know, almost 40 years ago. [00:08:10] Speaker 2: Well, Sylvan Lane, thank you so much for joining us today. We really appreciate it. Thanks for having me. [00:08:15] Speaker 1: We'll have more Rising for you right after this.