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This Recession May Be Mild. The Second One Will Be Worse.

Robert Heller
Tue, July 12, 2022, 3:30 AM

The U.S. is likely entering the first dip of a double-dip recession, writes former Federal Reserve Board Governor Robert Heller.

ECONOMY & POLICY

This Recession May Be Mild. The Second One Will Be Worse.

COMMENTARY
By Robert Heller
July 12, 2022 3:30 am ET

About the author: Robert Heller is a Former Member of the Board of Governors of the Federal Reserve System.

The U.S. has now likely entered a recession, and the chances are good that this will be the first dip of a double-dip downturn—thereby repeating the experience of the early 1980s.

The most recent data published by the Bureau of Economic Analysis show that real gross domestic product decreased at an annual rate of 1.6% in the first quarter of this year. And the GDPNow data published by the Atlanta Fed peg the growth rate for the second quarter at a negative 1.9%. Many economists regard two quarters of negative growth as a recession, but it is up to the National Bureau of Economic Research to make the official call—which usually takes them quite a long time to accomplish.

A number of factors have contributed to the economic slowdown. Among them are the cessation of federal stimulus payments to individuals and corporations, as well as a significant slowdown in the construction and goods-producing industries.

However, Federal Reserve policy is still highly stimulative. The official Fed Funds Rate is now pegged at 1.50-1.75%, but the consumer-price index has risen by 8.6% over the last year, yielding a real or inflation-adjusted fed funds rate of approximately minus 7%. This is a highly stimulative fed funds rate by any measure. Similarly, longer-dated treasury bonds offer only negative rates of return in the neighborhood of minus 5%. If the policy of the Federal Reserve were truly restrictive, one would expect the fed funds rate and Treasury yield curve to be above the inflation rate.

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