A recession is hard to predict, but consensus is growing among major banks and leading economists that deflation is coming as the Federal Reserve ramps up its war on inflation.
It comes with hope Fed In making the rarest of economic gains as it transitions into full-fledged inflation: calm consumer demand enough that prices stop rising, without crushing it so much that it drives the economy into recession. Although Fed policymakers count on finding that elusively beautiful equation – known as a soft landing – history shows that the US central bank often struggles to walk this fine line between tightening policy and maintaining economic growth.
Bank of America, Deutsche Bank, Wells Fargo, and Goldman Sachs were among the most prominent banks forecasting the possibility of a recession over the next two years, as the US central bank moves to tighten monetary policy aggressively in order to calm consumer demand and return inflation to its 2% target.
While the economy is still fairly strong at the moment, there are growing signs that Wall Street may be right: US economic growth is already slowing, with the Bureau of Labor Statistics reporting earlier this month that gross domestic product has shrunk indefinitely. Expected in the first quarter of the year, which marks the worst performance since the spring of 2020, when the economy was still deep in the midst of the Covid-induced recession.
Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, low incomes, and slow retail sales. But they differ greatly in how they actually appear, which is equally difficult to predict.
Recent research by former Federal Reserve Vice Chair and Princeton economist Alan Blinder identified 11 Fed tightening cycles since 1965, followed by 8 recessions. Most of the downturns were very mild; There were 5 cases in which GDP fell by less than 1%, or there was no economic downturn at all.
“Do we get stuck with a recession? Maybe,” Blinder wrote in a recent editorial in the Wall Street Journal. “The odds were probably above 50% even before the first-quarter GDP report,” he wrote. “But it is important to note that no recession should be deep and prolonged, unlike in the 1970s and early 1980s.”
Economists at Deutsche Bank expected a recession starting next April as a result of the Fed’s efforts to tame inflation. But the team said it was likely to be “moderate”, very different from those Americans experienced in 2008 and 2020. “This could look like several years of anemic growth, or a very short recession in which GDP doesn’t drop much and the economy recovers relatively quickly,” the team added.
The Fed has already voted to raise the short-term interest rate by 50 basis points in May and has indicated that increases of a similar size are on the table at upcoming meetings as inflation remains near a 40-year high.
Higher interest rates tend to create higher rates on consumer and business loans, slowing the economy by forcing employers to cut back on spending.
Federal Reserve Chair Jerome Powell has reiterated this sentiment in recent public forums and promised that the Fed will raise interest rates as high as needed to cool rates.
As he said last month during a live broadcast by the Wall Street Journal: “What we need to see is inflation coming down in a clear and convincing way and we’ll keep pushing until we see that.” “If it involves exceeding widely understood levels of neutrality, we will not hesitate at all to do so.”
Of course, some economists are more pessimistic about the outlook. JPMorgan CEO Jamie Dimon warned of a looming “economic hurricane” this week, citing concerns about high interest rates, inflation and the war in Ukraine.