Mint Explainer: What’s a Goldilocks economy that everyone’s talking about? | Mint – Mint

Written by Amanda

The last few days have seen gloomy projections about the US economy. Tesla CEO Elon Musk says that he has a “super-bad feeling” about the US economy. JPMorgan Chase & Co. CEO Jamie Dimon said he senses a “hurricane” right out there down the road coming the US economy’s way. Citigroup boss Jane Fraser said it won’t be easy for the US to avoid a recession. BlackRock co-founder Larry Fink expects inflation to remain elevated for several years.

Investors around the world are weighing the odds of the US tipping into a recession, triggering, in the worst-case scenario, a full-blown global recession, against the hope that the Fed’s belated attempts, more aggressive than earlier expected, to clamp down on high US inflation will after all result in a soft—or at least softish, a word Fed Chief Jerome Powell used—landing. The global markets and economy discourse has both the narratives running in parallel. Meanwhile, Powell has cautioned that the Fed is unlikely to blink until the historically-high US inflation, controlling which US President Joe Biden has said is the top economic priority, is brought under control.

When Powell says that soft or softish landing is what the Fed is hoping for, although it can’t guarantee it, he means to say that demand in the US would be cooled off and brought closer to supply. This, in turn, would nudge wages down, resulting in lower and stable inflation. But most importantly, all this will be accomplished without having the US economy in recession, or a material rise in unemployment.

In this context, commentators are expressing the hope that the Fed can still pull off a return to “Goldilocks”. What they refer to is an economy that’s not too hot and not too cold but just right. In this perfect state, steady economic growth prevents a recession; however, growth is not so hot as to stoke inflation. In other words, the hope is that in its war on four-decade high inflation, the Fed will slow down the US economy gently without letting it tank.

How optimistic is it to expect inflation will be controlled without requiring a recession? In other words, how optimistic is it to dream of a glide to a Goldilocks economy? It’s going to be difficult. US inflation has been up at a four-decade high, and there are lingering supply-side constraints from the pandemic lockdowns, including in China, and the war in Europe. The US has far more job openings than number of applicants for the vacancies. As companies find it hard to fill those, the rate of unemployment has been keeping wages firm.

Earlier this year, before inflation had climbed as high, Fed officials mapped out their expectations for raising its key interest rate past the estimated neutral level — where it assures stable prices and full employment over the long run — without causing a recession, sparking off expectations that the US central bank was confident of everything turning out just right, as the porridge did for Goldilocks in the popular children’s tale. Powell made a presentation in a press briefing about the Fed’s determination to prevent high inflation from becoming entrenched and put the probability of a recession within the next year not particularly elevated.

But new data released in the weeks that followed showed the US economy’s recovery to be much more powerful than previously expected. Strong US jobs reports thereafter forced reassessments and increased the risk that inflation can only be tamed by aggressive monetary tightening and high interest rates. Therefore, a new set of predictions has begun to emerge that a recession is unavoidable and a Goldilocks scenario less likely than previously assumed.

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Source: livemint.com

About the author


Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai