A new study suggests that concerns about an impending financial crisis in the US may be overstated, as bank bond portfolio losses from rising interest rates were offset by benefits from cheap deposits. However, the economy’s behavior is notably different than it used to be. The US Central Bank’s interest rate hikes may affect the job market, and economic growth has sped up at times to keep inflation in check. The Fed’s debate over whether to pause or continue rate hikes revolves around risk. Some argue that the unusual start of inflation in 2021 could allow for an unusual resolution, but others warn that a recession may be necessary to regain control of inflation.
Goldman Sachs chief economist, Jan Hatzius, is among those who anticipate that the economy will continue to expand even as inflation subsides. However, the big question is whether the continued health of the job market is consistent with inflation falling steadily from its current level of over 4% to the Fed’s 2% target. Industries such as construction, which typically suffer during economic downturns, have $500 billion in pandemic-era savings still held by households whose jobs are being kept by rotating buildings, with low leverage and low interest rates. Cash flow has improved from refinancing mortgages when they were at record lows, and savings can support current spending.
Despite the optimistic outlook, uncertainties abound, and some officials fear that economic developments could overshadow factors that are currently working in their favor.