'Every Time Inflation Falls, There's A Major Recession': Chicago Fed President Says Economy Holding Up Against All Odds

BY Benzinga | ECONOMIC | 11/14/23 01:54 PM EST

Before the market opened on Tuesday, the Bureau of Labor Statistics reported cooler-than-expected consumer price index inflation data for October, showing that inflation is slowing down.

Every time in the past, the Fed driving inflation lower has been accompanied by a recession, Federal Reserve Bank of Chicago President Austan Goolsbee told the Detroit Economic Club. 

Yet, against all odds, it looks like the Fed could continue to bring inflation lower without causing a major recession, he said Tuesday. 
The pattern of recessions following drops in inflation driven by monetary policy "not just the Federal Reserve. That's central banks around the world," Goolsbee said. 
Inflation Could Fall By Record Amount: Goolsbee spoke about the late Paul Volcker, who led the Federal Reserve through economic turmoil and high inflation in the 1980s. The largest 12-month drop in inflation was under Volcker's leadership, but Goolsbee said the U.S. could surpass that milestone this year.

Read Also: Inflation Drop Triggers Market Rally: Economists Reassess After Surprising October Results
Many economic experts, including Federal Reserve Chairman Jerome Powell, said they expected an uptick in unemployment and a potential recession to bring inflation down from its 40-year highs in 2021. But the economy has withstood rate increases better than expected, and has remained strong by many metrics despite the highest interest rates in the last 15 years.

Chicago Fed President Quoted: "We've made a lot of progress on inflation, we've cut it down by 50%. So far we've done it mostly through the price of goods. The services part is always slower to come down and sticky ... The thing that will determine if we are on the right path is what's going to happen to housing."

The manner in which inflation is calculated for housing prices lags behind other economic data, Goolsbee said, adding the Fed has seen rent and housing prices start to come down, but he will need to see that trend continue. 

Market Price Action: The SPDR S&P 500 Trust tracking the S&P 500 was trading up nearly 2% Tuesday afternoon following the cooler-than-expected inflation numbers from October.

Tech, particularly Nasdaq stocks tracked by the Invesco QQQ Trust Series 1 , showed significant strength in the session on hopes that the Fed will not have to raise interest rates further. 
Related Link: Could This Investor's Move Signal Bull Market For US Stocks?

Photo by Aaron Bry. 

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

fir_news_article