The U.S. economy may be in such “fantastic shape” that even Federal Reserve Chair Jerome Powell has struck a note of optimism, but according to famed Harvard economist Martin Feldstein, a decline in equity prices could push the economy into another recession.
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Feldstein said the 10-year Treasury yield, which at more than 3 percent is at its highest level since May, could cause a “real challenge” for equity prices as it continues to rise.
“If interest rates, long rates, get up to 5 percent for Treasurys and more for corporates, then I think we could see a sharp reversal in equity prices, and that could hurt consumer spending and push us into a recession,” he said on Wednesday during an interview with FOX Business’ Stuart Varney.
If a recession does hit, Feldstein said, it would be unlike the 2008 Great Recession, which was in part so damaging because of the fragility of the banks and other financial institutions.
“But,” he said, “if the economy turns down, the Fed is in no position to offset it when the federal funds rate is as low as 3 percent.”
During a press conference on Tuesday, Powell said the combination of record-low unemployment and low inflation shows the country is going through “extraordinary times,” but maintained the central bank’s position of gradually raising interest rates.