It’s called the Great Moderation, and it’s roughly 20 years old, give or take. The burning question: will it get any older.
The moderation is a reference to the fall in macroeconomic risk in the U.S. since the mid-1980s. GDP volatility has fallen dramatically since the roller coaster ride of the 1970s and early 1980s. The primary catalyst: shorter, shallower recessions that occur less frequently. In short, economic nirvana. But what’s behind the fading of recession risk?
Among the various theories for why the angels of moderation have graced the U.S. economy: the Federal Reserve has learned a thing or two over the decades in how to dispense monetary policy that’s not too hot, not too cold. The rise of the services economy, which tends to be less cyclical, is a factor too.
But is the Great Moderation now living on borrowed time? It’s a timely question for a number of reasons, starting with the fact that the U.S. economy is probably already in a recession, as we’ve discussed. Will this one be short and shallow too?