TRUST THE PROCESS

There has been a lot of talk about recessions lately. An ominous brew of fear and loathing, the majority of the nation’s economists are now projecting the United States will dip into recession during the next 12 months, and pundits are quick to assign blame to the Federal Reserve Bank for its aggressive interest rate hikes. The Atlantic recently published an article entitled, “The Federal Reserve’s Artificial Recession,” and JP Morgan’s chief financial strategist told Forbes that the Federal Reserve Bank is pushing the economy into recession “quite unnecessarily.”

What seems absent from the conversation is just how good the Federal Reserve has become at managing our nation’s economy. Consider that between 1845 and 1919, an average economic expansion lasted about 26 months and an average recession lasted about 22 months, a ratio of 1.2 expansion for every 1 month of recession. Between 1919 and 1945, the expansion-to-contraction ratio increased to nearly 2:1, with an average expansion lasting nearly 36 months and an average contraction lasting about 18 months. Since 1945, that ratio has increased to a remarkable 6.4:1, with an average expansion lasting 64 months and an average contraction lasting a little more than 10 months.

Stated differently, the average recession has been cut in half and the average expansion has more than doubled. There are those who believe this is the result of mere serendipity. I think not.

The United States Federal Reserve System includes the Board of Governors, Federal Reserve Banks and the Federal Open Market Committee. The diverse talent amassed within these regulatory, policy and operating bodies is without comparison globally and may very well be the greatest assemblage of economic brainpower in the history of mankind.

Importantly, these policymakers are not only gifted in their own right, but also benefit tremendously from the lessons of history as well as unprecedented access to economic data. Consider the quantum leap in information availability between when the Federal Reserve Bank was created in 1913 – about 30 years before the first computer was invented – and today, where the Internet makes economic data ubiquitous. In a spring 2023 commencement speech to the University of California, Berkley, Federal Reserve Governor Lisa Cook referenced using Zillow to track rents and Open Table to track people’s willingness to reengage in social interactions as the nation emerged from the pandemic. These, and countless other data points, were not only unavailable, but unimaginable, just a decade ago.

Beyond this, the Federal Reserve has also added tools to its toolbox. In addition to making adjustments to the federal funds rate, it engages in open market operations (i.e., buying and selling government securities on the open market), adjusts reserve requirements for banks, utilizes discount window lending (i.e., short-term lending to banks), provides forward guidance to stakeholders and engages in quantitative easing (i.e., large-scale purchase of financial assets). Forward guidance as we know it today was not provided prior to 2003, and quantitative easing was first implemented during the financial crisis of 2008. Both have played significant roles in managing recent downturns.

There is an epidemic of distrust in our country. Some of that distrust has been earned and some of it reflects the healthy degree of skepticism that is an essential check and balance on those in power, but it is important to be ever mindful that the vast majority of people who serve this nation are honest, hardworking and capable civil servants.

While reasonable minds can, and often should, differ, I believe those minding the shop of the world’s largest economy are not only qualified subject matter experts but also have the best interest of our nation – their nation – in mind. Piling on seems to have become a national pastime, and social media all too often perpetuates an echo chamber of cynicism and criticism absent qualification or accountability. I would respectfully submit that the Federal Reserve’s ability to block out the noise and stay above the fray is directly correlated to recessions getting shorter and expansions getting longer.

We have all benefited immensely from their work, and it seems to me they deserve not only our gratitude, but our trust in navigating the inevitable ups and downs of the economic cycle.