Fed staff predicts recession this year

The Federal Reserve’s staff has recently expressed that the central bank may not be able to control the nation’s inflation without causing a recession.

During the Federal Open Market Committee’s March meeting, staff predicted a mild recession, according to minutes from the meeting released on Wednesday. The meeting came right after the banking system experienced chaos due to the collapse of Silicon Valley Bank. During this meeting, the Fed controversially voted to increase interest rates once again.

The Fed has acknowledged that a possible recession is more likely, and a “soft landing” scenario is now seemingly impossible. This marks the first time that Fed staff publicly acknowledged this prediction.

Although at the March meeting, Fed officials’ projections imply that the unemployment rate will rise to 4.5% by the end of this year, compared to 3.6% today, and GDP projections for this year were revised down from 0.5% to 0.4% growth. The two projections did not necessarily indicate an upcoming recession, making the staff’s prediction of a mild recession interesting.

It is worth noting that, according to the rule of thumb, a recession is typically indicated by two consecutive quarters of negative GDP growth. Although growth was negative in the first and second quarters of last year, a recession was not declared since the unemployment rate remained low and GDP rebounded in the third and fourth quarters.

Although the next Fed meeting is scheduled for May, it is unclear whether the central bank will decide to pause its rate-hiking since there have been signs of inflation slowing down and the labor market becoming soft.

According to the Bureau of Labor Statistics, inflation dropped almost a percentage point to 5% in the year ending in March. However, certain aspects revealed the underlying inflationary pressures that the economy has been suffering from.

While the latest employment report showed a slower job growth, it still appeared to be a fairly strong report. The Bureau of Labor Statistics reported that 236,000 jobs were added in March, lower than the average of 334,000 over the last six months.

Currently, according to CME Group’s FedWatch tool, which determines the probability using short-term market targeted by the Fed’s future contract prices, investors are considering a 70% possibility of the Fed raising rates one more time.

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