As Americans feel another recession coming through increased inflation and higher interest rates, the Federal Reserve Bank is leading us into that recession.

The Fed passively looked on during the Great Recession of 2009, in which the U.S. unemployment rate peaked at 10 percent, and it is about to do so again. As long as the Federal Reserve Bank overzealously raises interest rates while ignoring relevant risk factors, we will suffer negative economic consequences. Specifically, we will continue to suffer from high inflation and its downstream effects, like climbing consumer debt (which hit a 14-year high in the fourth quarter of 2022) and credit card losses, which are higher than they have been since the Great Recession. To avoid the same mistakes that precipitated the Great Recession over a decade ago, the Federal Reserve must pause interest rate hikes.

In 2007 and 2008, the Federal Reserve Bank of the United States foolishly failed to recognize several occurrences that heightened the risk of a recession. It did not recognize the heightened risks of subprime mortgage lending to high-risk borrowers (who defaulted at an all-time high of 11.48 percent in the first quarter of 2010). It overlooked the radical growth of trading derivative assets from those loans that were caught flat-footed by the collapse of Bear Stearns, which it brokered last-minute. Starting in March 2008, it started lowering interest rates, but over time, it hit the infamous liquidity trap: getting so close to zero that it could not lower rates further without incentivizing people to remove their money from banks.

Today, the Federal Reserve Bank is at risk of being caught unaware by another looming recession. Regional bank failures, along with the significant strain remote work puts on commercial property vacancies, warn of another recession. The Federal Reserve has exacerbated this situation by applying further negative pressure to the money supply, raising interest rates by 5 percentage points from March 2022 to July 2023. 

The economy typically takes 12 to 18 months to respond to a rise in interest rates, so Federal Reserve Chairman Jerome Powell appears to be overly weighting economic data. That will make it harder to accommodate regional banks. The reduction in credit from regional banks, and the $500 billion in commercial real estate debt that will come due in the next two years, will catch The Federal Reserve unawares. To Powell’s credit, he held off on a further rate increase at the most recent Federal Reserve meeting, but it could be too late: The aforementioned domestic risks, along with China’s multifaceted economic crisis, will be exacerbated by the Federal Reserve Bank’s extreme tightening of the money supply.

The U.S. economy experienced a slight recession in early 2022 and has been stuck barely above a 2 percent annualized real growth rate in the quarters since then. A year ago, the rates were a full 2.25 percentage points lower than they are now, having increased from 3.08 percent to 5.33 percent. Going back to February 2022, the effective federal funds rate was a full 3 percent below that at 0.08 percent. We still may not be seeing the full effects of the most recent set of rate increases, given the time it takes for them to take full effect.

The Federal Reserve Bank must stop raising rates going forward, with intentions to reduce rates over time to relieve some of the negative pressure on the money supply. The Federal Reserve Bank has a twin mandate of low unemployment and low inflation. If it is to avoid a repeat of the Great Recession, the Fed must give its disinflationary policies enough time to take effect rather than piling on interest rate increases.