Insider Q&A-Benn Steil of the Council on Foreign Relations


WASHINGTON (AP) – Over the past year, the world economy has withstood the combined shocks of high interest rates and a war in Ukraine better than just about anyone expected.

The International Monetary Fund, among other agencies, has upgraded its economic forecast for 2022. Europe has defied fears that an energy shock from the cutoff of Russian natural gas would cause a severe recession. The U.S. job market remains super-charged.

The Associated Press spoke recently about the economy’s surprising resilience with Benn Steil, director of international economics at the Council on Foreign Relations.

The interview has been edited for clarity and length.

Q: For a year, the Federal Reserve and other central banks have been raising rates to fight inflation, and the war in Ukraine has raged on. But the world economy is in better shape than expected. What happened?

A: Europe has been more robust than almost everyone anticipated a year ago. We also had quite an impressive adaptation of the global energy market, with liquified natural gas coming into Europe from the United States. That all happened in a more orderly way than most observers had anticipated. We’ve had unusually mild weather in the United States and Europe. The energy markets have been the biggest positive surprise.

In the United States, you had an economy that was still being fueled by the federal stimulus in 2020-2021. Now we are clearly seeing the sectors of the economy that are interest-rate sensitive slowing down, particularly the housing market. But that has not yet filtered through to the broader economy. It will no doubt do so to some significant degree this year. The question remains as to whether that means the U.S. economy will be in recession later this year or whether we may possibly avoid it entirely or at least push it into 2024.

Q: What are the prospects for a soft landing – the Fed taming inflation with higher rates without causing a recession?

A: It certainly looks better than it did last summer. It looks like there is more of a realistic possibility.

Q: But what about persistent inflation?

A: The most recent set of inflation data are clearly backing those who had expressed concern with inflationary pressures being long-living. Despite the fact that we had many months after the summer of declining inflation, the most recent data indicated that the services sector has proven more robust than the inflation optimists had predicted.

Q: How might turmoil in the banking system affect the outlook for the world and U.S. economies?

A: If the Fed, Treasury and FDIC cannot calm the markets quickly, it should certainly have an effect. Small and midsize banks will pull back on their lending, raising borrowing costs, lowering investment and dampening spending. This would increase recession risks and therefore complicates the Fed’s decisions.


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