Federal Reserve Officials Reveal When They Expect A Recession To Strike

Economists at the Federal Reserve have forecasted that a mild recession would hit the United States during the second half of 2023. The Federal Open Market Committee and the Federal Reserve Board of Governors have concluded in a recent meeting that the financial turmoil in the system warrants a recession forecast for the end of the year with a recovery expected in the next two years. The minutes have also suggested that the historically low unemployment rate will increase towards the beginning of next year. Federal Reserve officials have repeatedly increased the target funds rate to combat record inflation, posing the risk of slowing down the economy as consumers and businesses face higher borrowing costs.

According to the minutes, the risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly since historical recessions related to financial market problems tend to be more severe and persistent than average recessions. Due to inflationary pressures and supply chain bottlenecks threatening recovery from the lockdown-induced recession, fears of contraction have persisted for the past two years.

Banking and financial conditions along with its effects on macroeconomic conditions will play a crucial role in the baseline’s future risks. Policymakers estimated that if the effects of the recent turmoil in the banking sector on macroeconomic conditions cease quickly, the risks around the baseline would be tilted to the upside for both economic activity and inflation. However, if it worsens beyond the baseline assumption, the risks would be skewed to the downside for both economic activity and inflation.

Two firms, Silicon Valley Bank and Signature Bank, recently collapsed due to panic withdrawals, causing widespread concern over the stability of the sector. Assets in the banking system have gone down by $2 trillion lower than their value, prompting worries about the stability of the sector. Even customers with balances over $250,000, the limit covered by Federal Deposit Insurance Corporation, were affected, which made Treasury Department and Federal Reserve officials take immediate action to protect all deposits and mitigate the risk of bank runs.

The Federal Reserve officials’ prediction of a mild recession comes after Treasury Secretary Janet Yellen’s assertion that she is not anticipating a downturn in the economy. President Joe Biden also claimed on Wednesday that his policies have created a more dynamic economy for the long haul.