A US Recession Is Still Possible
Between stubbornly high underlying inflation, financial conditions that aren’t tightening as much as people assume, and relatively low real interest rates, the US Federal Reserve still has ample reasons to pursue additional rate hikes. If that happens, the risk of recession will increase.
WASHINGTON, DC – Optimism is growing that the United States can avoid a recession. A Wall Street Journal survey of economists in July found that only 54% expect a recession in the next 12 months, down from 61% in April. Economists at Goldman Sachs have lowered their estimate of the probability of a recession to 20%. Following the release of encouraging consumer price index (CPI) data on July 12, investors have grown more confident that inflation can be tamed without sacrificing economic growth.
This emerging consensus may end up being correct. We are all rooting for a “soft landing” in which inflation continues to glide down toward the US Federal Reserve’s 2% target without the economy shrinking. But I worry that a recession in the next year is much more likely than not.
After all, underlying inflation is still double the Fed’s target, and its downward trend has not made meaningful progress in 2023. Given this reality, it was quite confusing to see so many commentators unfurl a “Mission Accomplished” banner following the latest data release.
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