February 1, 2023

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US Recession Is Avoidable If Fed Is Able to ‘Thread the Needle’

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To hear some of the chatter in financial markets and corporate America’s C-suites, a US recession is imminent and inevitable.

Not necessarily so.

While the danger of a downturn has risen as growth has slowed, most economists argue a contraction is unlikely in the immediate future, given the continued strength of the jobs market and the more than $2 trillion in excess cash on household balance sheets.

It’s next year they’re more worried about, as the Federal Reserve’s continuing interest-rate hikes increasingly bite and decades-high inflation eats into that cash surplus.

But even then, an economic decline isn’t a slam dunk. Ex-Fed official and Deutsche Bank AG economist Peter Hooper was among the first to forecast a recession, and puts the odds of one happening next year at 70%-plus. Yet he says he can still see some scenarios for avoiding one.

That would, to use the words of Treasury Secretary Janet Yellen, take luck and skill on the part of the Fed as it seeks to rein in surging prices. Success will also depend on forces beyond the central bank’s control — a point Fed Chair Jerome Powell himself has made, amid supply-chain shocks caused by the pandemic and Russia’s Ukraine war.

Based on the critical assumption that the worst economic effects of Covid-19 and the war are behind, Moody’s Analytics chief economist Mark Zandi is betting the Fed can pull it off.

“I still think we’re going to navigate through without a recession. But obviously it’s going to be very, very tight because risks are very high,” he said.

A lot is at stake. A recession would likely throw hundreds of thousands of Americans out of work and trigger another big downdraft in the stock market. It would also spell further trouble for President Joe Biden, whose Democrats are already on the back foot in defending thin congressional…

2022-06-04 13:00:01

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