The Federal Reserve’s own economists have joined the group of private-sector forecasters who are rethinking their calls for a recession this year, or becoming more confident the US will skirt a downturn altogether.
(Bloomberg) — The Federal Reserve’s own economists have joined the group of private-sector forecasters who are rethinking their calls for a recession this year, or becoming more confident the US will skirt a downturn altogether.
Their growing faith in the economy is set to be strengthened on Thursday, when government data will probably show gross domestic product expanded at a 1.8% annualized pace in the April-to-June period. That would be down only slightly from 2% in the previous quarter, and roughly in line with the Fed’s assessment of a sustainable long-term rate.
It’s also a stark turnaround from three months ago, when forecasters were predicting almost zero growth in the second quarter.
While consumer spending — which accounts for most of the economy — likely cooled significantly in the last three months, a turn higher in business investment may have offset it. Such spending, including on factories, has been helped by subsidies enacted by President Joe Biden with the intention of reducing US dependence on China.
On Wednesday, Fed Chair Jerome Powell revealed in a press conference that his staff had ditched the recession forecast it put in place in March, when banking-sector turmoil had raised fears about a potential credit crunch. His comments followed a decision to raise the central bank’s benchmark interest rate to the highest level in 22 years.
With the Fed now out of the way, investors are looking ahead to the string of economic reports to be published in the coming days, starting with Thursday’s GDP report. While Powell left the door open to additional rate hikes, the data may set the stage for an extended pause instead, according to Alex Petrone, the director of fixed income at Rockefeller Asset Management.
“We do believe that we’re at or near the end of this hiking cycle, and that rates are likely to stay high,” she said. A resilient economy “really pushes out the risks, in many respects, of slower growth and recession, and allows the Fed to stay higher for longer.”
What Bloomberg Economics Says…
“We estimate real GDP growth accelerated slightly in the second quarter, with consumer spending providing the most support. Still, with demand for discretionary goods waning, cautious producers likely allowed for just modest accumulation of inventories.”
— Eliza Winger, economist
To read the full note, click here
Inflation, as usual, is the other piece of the puzzle. Powell on Wednesday called out several key reports officials will be looking at between now and their next policy meeting in mid-September, including quarterly employment cost index data due Friday morning.
But he also emphasized that the Fed isn’t going to wait until inflation recedes all the way back to the central bank’s 2% target to stop hiking, or even start cutting, interest rates.
“The idea that we would keep hiking until inflation gets to 2%, it would be a prescription of going way past the target. That’s clearly not the appropriate way to think about it,” Powell said. “The federal funds rate is at a restrictive level now. So if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore.”
–With assistance from Catarina Saraiva and Reade Pickert.
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