Markets are not only acting unafraid of a looming recession but also may actually want one that would eradicate some of the other ills facing the U.S. economy, according to one Wall Street analysis. DataTrek Research co-founder Nicholas Colas said an economic contraction could help take out three issues bedeviling growth now: declining productivity, high inflation and an aggressive Federal Reserve that keeps raising interest rates. “Every recession since 1960 has caused all three issues to reverse course, and quickly,” Colas wrote in his daily market note Thursday evening. “Recession, for better or worse, is a ‘feature, not a bug.'” Wall Street economists and strategists widely expect a recession to set in later this year, the product of a number of factors. They include the Fed rate hikes aimed at controlling inflation and a credit crunch expected from the banking tumult in early March. The Fed’s own economists said at the central bank’s March meeting that they expect a mild recession ahead. Despite the ominous economic headwinds, markets have held tough. The S & P 500 is up more than 7% in 2023 and the CBOE Volatility Index just came off its lowest level since late 2021. If there’s a contraction in the cards, markets are betting it will be short, with a solid recovery on the other side. .SPX YTD mountain A good start to the S & P 500 Digging deeper, Colas said the history of recessions is on the market’s side. For one, recessions typically see labor force productivity accelerate as businesses cut fat and focus on efficiency, boosting output and earnings. “Stocks bottom before the US economy hits its lows in any given recession because markets understand this dynamic,” Colas wrote. Secondly, the Fed generally cuts interest rates in reaction to a recession. Markets and central bankers are currently not on the same page when it comes to the direction of rates this year. While both see a final hike in May , traders expect the Fed to be in cutting mode by the end of the year in response to a downturn, while policymakers have stressed the importance of fighting inflation through tight monetary policy. “Markets know this history, which is why they see an upcoming recession as finally bringing the Fed around to starting the next easing cycle,” Colas said. “More important, in some respects, is that the Federal Reserve knows this as well.” Finally, a recession will dampen demand and thus bring down the most nettlesome economic problem of all, namely inflation that is still running well ahead of the Fed’s 2% goal . As those dynamics work together, a recession both would bring down prices while improving labor force productivity, which was negative for the first two quarters of 2022 before posting modest rebounds in the second half of the year. “There are other pathways to achieve those necessary goals, but none will work as quickly as an economic contraction. And that’s why the market sees a recession as a feature, not a bug,” Colas said.