Question:
The Fed decided to raise interest rates again today. While initially when rate hikes were aggressive, there was a large worry of creating a recession. As inflation has cooled, consumer confidence at its highest level in two years, and a continued relatively strong job market the risk/worry for a recession has shrank. There has been some talks of the Fed successfully achieving the 'soft landing' they had hoped for when they first began to raise rates. However, is our risk of recession actually higher with student loan payments beginning again in the fall coupled with the high interest rates? And is the Fed not taking these payments into account in their forecasts? Just as the pause in these payments (among other things) helped contribute to inflation in the first place, it seems to make sense that the restart of these payments will reduce consumer spending and therefore constrict growth in our economy possibly causing a recession. Thanks in advance for any insight!Answer:
Members of the Federal Open Market Committee (FOMC) take a broad range of information into account when forming their economic forecasts, including considering how changes to fiscal policies may affect the economy. One way to get a sense of the information provided to monetary policymakers is to view past Tealbooks -- i.e., the reports that Federal Reserve Board staff prepare for the FOMC before each monetary policy meeting and that contain in-depth analysis of current economic and financial conditions and forecasts. Tealbooks become available with a five-year lag. The 2017 versions are here: https://www.federalreserve.gov/monetarypolicy/fomchistorical2017.htm The eight installments of Tealbook A from 2017 show, for example, how Board staff was thinking about fiscal policy changes that were likely to be enacted under the Trump administration and their estimated effects. (The Tax Cuts and Jobs Act was ultimately not signed into law until December 22, 2017, after the last FOMC meeting of the year.) Similarly, although I cannot point to analysis in current Tealbooks (wait 5 years!), it's safe to say that Board staff are incorporating predictable events, like the resumption of loan payments, into their projections. Moreover, policymakers are well aware of this coming change (e.g., https://www.cbsnews.com/news/neel-kashkari-face-the-nation-transcript-07-30-2023/), and economists, more generally, have analyzed what impact the change could have on the economy (see, for instance, https://cre.moodysanalytics.com/insights/cre-news/resuming-student-loan-payments-may-exacerbate-affordability-crisis-and-pressure-retail-sector/).