Federal Reserve Chairman Jerome Powell does not think we need to worry about a recession.
If history is any indication, we should probably be worried about a recession.
During his press conference following the March FOMC meeting, Powell called the economy " strong overall " and dismissed growing concerns about a recession, saying, " We don't make that forecast."
Not everyone is convinced.
Concerns about a recession have increased over the past month with the outbreak of the trade war. The Atlanta Fed's GDPNow forecast plummeted from a 2.3% growth rate at the end of February to -2.8% in a matter of weeks. It currently stands at -1.8%.
And despite Powell's optimistic arguments, the Fed cut its growth forecast to 1.7% this year, 0.4 percentage points lower than projected in December. While this is far from a recession, it does indicate that central bankers are not as optimistic as Powell made it sound.
Anyway, the Fed chairman thinks the economy is going to be fine. Shouldn't that reassure us?
Well, maybe not.
A journey into the past
Let me go back to early 2007. It was becoming difficult to ignore the cracks forming in the subprime mortgage market. Some analysts were beginning to warn that bigger problems could be on the horizon.
At that time, the U.S. economy was still enjoying the boom generated by the artificially low interest rates imposed by the Federal Reserve after the bursting of the dotcom bubble. The central bank cut interest rates to a record low of 1% in 2002. Credit was easy and money flowed, especially into residential real estate.
In late 2005 and early 2006, the Federal Reserve began to normalize monetary policy to contain inflation. By June 2006, interest rates stood at 5.25 %, a level that was maintained until the first cut in September 2007. By April 2008, rates had fallen to 2 %.
And then, in October 2008, Lehman Brothers went bankrupt.
The financial crisis was underway.
If we overlay the history of interest rates through the Great Recession with the recent trajectory of rate policy, we are currently in late 2007 or early 2008.
At the time, some people were warning about the impending subprime crisis and the possibility of a recession, but in general, the mainstream insisted that everything was fine.
So what was the Fed chairman saying at the time?
Ben Bernanke said there was nothing to worry about. Everything was fine!
A New York Times article about Bernanke's testimony before a congressional committee in February 2007 was headlined, " Fed Chairman Projects 'Soft Landing' for U.S. Economy."
Soft landing - where have we heard that term?
During that testimony, Bernanke said that unemployment would likely remain low for the next two years, even if inflation declined slightly.
The NYT reported that his comments suggested he was comfortable with interest rates at current levels (just as Jerome Powell is comfortable with rates at the current level!).
As for the economy more broadly, Bernanke said it " appears to be making a transition from the rapid rate of expansion experienced during previous years to a more sustainable average pace of growth."
A month later, former Federal Reserve Chairman Alan Greenspan suggested that the economic expansion that began in 2001 might be losing momentum. Bernanke took the opposite view, stating that a recession was not on the horizon.
"I want to point something out: there seems to be a feeling that expansions die of old age.... I don't think the evidence supports that."
But what about the current subprime crisis?
Bernanke insisted that it was "contained."
"At this juncture...the impact of the problems in the subprime markets on the overall economy and financial markets appears to be contained."
In May 2007, he redoubled his efforts, this time stating that the subprime mortgage problem was "limited".
"Given the fundamental factors that should support housing demand, we believe the effect of the subprime sector's problems on the overall housing market is likely to be limited."
Most of the mainstream media followed Bernanke's lead. In fact, most insisted that all was well even in the summer of 2008.
Of course, we all know how the story ends.
History does not repeat itself...
As the saying goes, "History does not repeat itself, but it often rhymes". Well, we can easily hear echoes of 2008 in the trajectory of today's economy.
We had a massive injection of easy money into the economy, just like after the bursting of the dotcom bubble. Powell had to raise interest rates to contain inflation, just as Bernanke did in the early 2000s. The Fed began to loosen monetary policy, promising a soft landing, just as Bernanke promised in 2007.
And we have the same kind of people telling us that there is nothing to worry about.
Maybe it's time to worry.
Mike Maharrey , Money Metals