The Federal Reserve now denies the recession it has predicted for months

The president of the United States, Joe Biden, joked a month and a half ago about the forecasts that the world’s largest economy was going to enter a recession. “I’ve been hearing every month that there’s going to be a recession next month. I don’t think there is,” he said in June. The Federal Reserve economists now agree with him. Central bank technicians have been predicting a crisis for months. Now, they no longer expect a recession, at least this year, according to the minutes of the last meeting of their monetary policy committee, held on July 26.

“The economic forecasts prepared by the experts for the July FOMC meeting were stronger than those for June,” the document states. Since the appearance of tensions in the banking sector in mid-March, the indicators for spending and real activity have been better than expected, so that “experts no longer considered that the economy would enter a mild recession towards the end of the year “, Add.

In the minutes of the meetings held in March, May and June, the central scenario included a drop in activity both in the fourth quarter of this year and in the first quarter of the next. As early as June, experts were beginning to correct themselves and considered that the possibility of the economy continuing to grow slowly and avoiding a recession was almost as likely as the baseline scenario of a moderate recession.

Now the recession is out of the equation. However, the experts of the Federal Reserve do continue to forecast that the growth of the gross domestic product (GDP) in 2024 and 2025 will be below their estimate of the potential growth of production, which would cause a slight increase in the rate unemployment from its current level.

The minutes, on the other hand, leave the possibility of further rate hikes in the air. As its president, Jerome Powell, already did at the press conference on the day of the meeting, the minutes indicate the risk of spikes in inflation, but they refer to the data that becomes known to gauge whether a further twist is necessary. to control inflation.

However, the tone of the minutes indicates that some members of the committee believe that it is time to wait. In fact, “a couple of participants were in favor of keeping the rates unchanged” already at that meeting. In it, the Federal Open Market Committee of the Federal Reserve, in charge of establishing monetary policy, resumed raising interest rates, with an increase of 25 basis points (0.25 percentage points), up to the range of 5, 25%-5.5%, the highest level since 2001.

Several participants noted that the risks were becoming both over- and under-tightening, and that “it was important that Committee decisions balance the risk of inadvertent over-tightening of policy against the cost of under-tightening”. As there are voices pointing to the risk that rate hikes could be excessive, the market seems to interpret that there may be almost certainly, and at least, a new pause in September. Many are betting that there will be no more increases in the remainder of the year and even believe that the rates have peaked at the current level.

The June rise came after the June break, the first in more than a year. The central bank of the United States has raised rates 5.25 points in a year and a half in its fight against inflation.

In the statement issued on July 26 after said monetary policy meeting, the Federal Reserve stated: “The Committee will continue to evaluate the additional information and its implications for monetary policy. In determining the degree of additional monetary policy tightening that may be appropriate to return inflation to 2% over time, the Committee will take into account cumulative monetary policy tightening, the lags with which monetary policy it affects economic activity and inflation, and economic and financial developments”.

The data published since then show a buoyant labor market, with an unemployment rate of 3.5%, very close to the minimum in 50 years, although job creation has slowed somewhat. Inflation, meanwhile, has picked up slightly to 3.2% after a year of decline. Core inflation, which excludes energy and home food prices, is at 4.7%, showing the risk of headline inflation picking up further.

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