After one of the fastest rate-hiking cycles in U.S. history, the economy has managed to avoid a recession. While we did experience a significant growth scare in 2022—marked by a 27% peak-to-trough decline in the S&P 500—an actual recession never materialized.
The Fed began raising rates in March 2022, moving from a federal funds rate of 0.5% to 5.5% by July 2023. They went on to pause rates at 5.5% for over a year. Notably, 98% of economists predicted a recession in 2023, yet it never came.
So, Why No Recession?
There were warning signs. In 2023, we witnessed four of the five largest bank failures in U.S. history. Arguably, had the Fed not intervened swiftly, we might have seen contagion in the financial system that could’ve sparked a deeper economic downturn.
At the same time, the launch and rapid adoption of OpenAI and similar technologies injected a wave of optimism and future-facing investment, particularly in the tech sector. It’s fair to argue that both Fed action and technological innovation helped delay—or even prevent—a recession.
Now, with the fed funds rate still hovering around 4.5% and no clear signs of imminent cuts, the U.S. economy remains surprisingly resilient. Consumers are mixed—pressured by inflation yet still spending. So, the question stands:
Does Monetary Policy Still Work?
In short: Yes—but not in the way it used to.
Monetary policy remains a key economic tool, but its influence has shifted. It’s inherently blunt and primarily affects borrowing costs, which in turn hit cyclical sectors of the economy—namely manufacturing, housing, and lower-income consumers. These areas did feel recession-like impacts during the tightening cycle.
However, the U.S. is now largely a service-driven economy, and that sector continued to grow even as rates rose. More importantly, high-income earners drive the bulk of U.S. consumption. While lower-income households have struggled with rising prices, aggregate economic data has been supported by the spending power of the wealthier segment.
During this period, the wealth gap widened further. High earners benefitted from rising home prices, strong investment portfolios, and, in some cases, even higher interest rates. Meanwhile, the stock market's performance—dominated by large-cap tech companies that don't rely heavily on borrowing—remained relatively insulated from the tightening cycle.
Final Thoughts
Monetary policy still matters, but its impact is no longer uniform. The structure of the modern U.S. economy—more service-oriented, more top-heavy in income distribution, and more reliant on tech—means that the Fed’s traditional tools don’t work the way they once did.
We’re navigating a new monetary landscape, and that’s something policymakers and investors alike need to adapt to.
-HPK Provident Advisors
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted