Monday Morning Scoop - The Fed Finally Admits to a 'Mild' Recession
The Fed Finally Admits to a ‘Mild’ Recession
For many months, the Federal Reserve has been saying that after the pandemic’s economic one-two punch (followed by three, four, and five), the agency could engineer a “soft landing.”
The minutes from the Fed’s Federal Open Market Committee meeting in March finally gave up on the soft landing and recognized that people and companies would have to buckle their seatbelts.
“For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market. Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” came the admission on page 6. “Real GDP growth in 2024 was projected to remain below the staff’s estimate of potential output growth, and then GDP growth in 2025 was expected to be above that of potential.”
Although finally using the words publicly, reality seemed clear last month when the Fed released its most recent economic projections. It went as follows for real GDP: 0.4% in 2023, 1.2% in 2024, and 1.9% in 2025, with long-term 1.8%. Unemployment projections were 4.5% in 2023, 4.6% in 2024 and 2025, and keeping the long-term 4.0%.
The same signs of slowdown came into personal consumption expenditures (PCE) inflation: 3.3% this year, 2.5% in 2024, and 2.1% in 2025.
The changes from the December projections seems small, but arithmetic says the Fed expects a big slowdown to reach the median projections they’re looking for. Unemployment is 3.6% right now. To get 4.4%, you have to jump well over 5% for things to average out, unless it just happens to edge up without stepping over. Historically, that isn’t an outrageous number and used to be close to what people considered “normal,” but in comparison to recent times, it is a big shift.
As for real GDP growth, Q4 of 2022 came in at 2.7%. The figures for the current quarter aren’t available—we’re not even past March—but, again, to get to the new figure, assuming Q1 hasn’t already crashed, and that seems unlikely, you probably need significant recessional levels in Q3 through Q4 to bring the average down sufficiently. Given how inflation quickly shot up and then slowly started to come down, leading to the lower-than-peak-but-still-high numbers now, the assumption of no overshoot with averages delivering the overall expectations isn’t a given.
Those who might hope the Fed would consider a recession would be reason enough to stop interest rate increases should remember that the note about a recession came with the March quarter point hike in the federal funds rate.
By: Erik Sherman