Apr 13, 2023 - Economy

The Fed is acknowledging a recession looks more likely

Illustration of an umbrella made up of money with a little raincloud over it

Illustration: Sarah Grillo/Axios

There has been a bit of a wink-and-nod act by Federal Reserve chair Jerome Powell over the last year, making gradually more explicit acknowledgments that a recession may result from the central bank's monetary tightening.

  • Now, the subtext has become the text.

Driving the news: Fed staff are now anticipating a "mild recession" later this year as their baseline forecast, followed by two years of recovery. That's according to the minutes of the last policy meeting published Wednesday afternoon.

  • Policymakers themselves aren't exactly pushing back against that notion, even if they are less likely to predict it explicitly. At that same meeting, they projected that the unemployment rate will rise by a full percentage point by the end of the year — an event that historically has only occurred during a recession.
  • Fed policymakers raised interest rates at that meeting anyway, and look likely to do so again in early May.

Why it matters: Among economic commentators and some Fed officials, there has been on-again, off-again hope that "immaculate disinflation" can occur, where price gains normalize without much economic pain.

  • But while nobody is quite ruling that out, the combination of persistent inflation and troubles in the banking sector is making it look like a more remote possibility than was the case a couple of months ago.
  • The official calculus is that inflation is coming down too slowly, and with too many false dawns along the way. Backing off their tightening campaign when the inflation-fighting job is not yet done could worsen the economic outlook.

Between the lines: The policy meeting took place in mid-March, right as fears about a banking crisis causing a broad credit contraction were at full boil. Since then, there have been no additional bank failures and the uptake of Fed emergency lending facilities has remained contained.

  • But while crisis fears have faded, it is still an open question whether the Fed's staff economist forecasts of a recession later this year will come to pass.
  • "Though things have stabilized since March's bank failures and no spillover effect has demonstrably harmed the broader U.S. economy, the uncertainty caused by the sudden crisis threatens to kick off a slower-burning, potentially more pernicious dynamic," said Matt Colyar, an economist at Moody's Analytics, in a note.

The other side: Asked about the prediction during a press gaggle Wednesday, White House press secretary Karine Jean-Pierre hinted that the Biden administration was not anticipating a recession.

  • "Recent economic indicators are not consistent with a recession or even a pre-recession," Jean-Pierre said.
Go deeper