US Recession Probability Nears 50%... Fed Likely to Take Giant Step

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The probability that U.S. economists see a recession occurring within a year has increased compared to a month ago, now reaching nearly half. In particular, about 5 out of 10 respondents expressed concerns that the central bank, the Federal Reserve (Fed), might unnecessarily amplify economic vulnerabilities by raising interest rates excessively. Reflecting this, there is a growing consensus within the Fed that a 1.0 percentage point rate hike at once is excessive.

◆18%→28%→44%→49%... Recession Concerns Rise Further

The Wall Street Journal (WSJ) reported on the 17th (local time) that the average response to the survey question on the "probability of a recession within the next 12 months" among economists was 49%. This is higher than 18% in January, 28% in April, and 44% in June of this year. Essentially, the odds of a recession are seen as nearly 50-50. In the past, the probability was 38% in December 2007, just before the global financial crisis, and 26% in February 2020, just before the COVID-19 outbreak.

These recession concerns are attributed to a combination of domestic and international adverse factors such as inflation at a 41-year high, interest rate hikes, and global supply chain disruptions. Forty-six percent of respondents pointed out that the Fed's rapid rate hikes could trigger a recession. Forty-two percent believed the Fed would pursue tightening at an appropriate level balancing soaring inflation and growth. Only 12.3% expected the Fed to raise rates too little.

James Knightley, Chief International Economist at ING, said, "Fiscal and monetary policies have been too accommodative for too long," adding, "The Fed is now trying to catch up, and there is always a possibility of overshooting." David Burson, Chief Economist at Nationwide Insurance, stated, "The key question is whether inflation will slow enough without the Fed tightening to the point of causing a recession," diagnosing, "We are on a knife's edge. Inflation shows signs of slowing but has not actually improved." The recently released U.S. Consumer Price Index (CPI) for June surged by 9.1%.

The forecast for the U.S. annual Gross Domestic Product (GDP) growth rate this year is expected to be only 0.7%, significantly lower than 3.6% nine months ago and 1.3% last month.

However, economists who anticipate a recession expect it to be relatively mild based on various indicator forecasts. Susan Stern, an economist at the Economic Analysis Association, said, "It is not a repeat of the 2008 recession but a mild recession," describing it as "a unique kind of downturn due to the rebound from COVID-19."

Additionally, 40% of respondents forecast the recession to last more than six months. Since 1950, the average recession duration has been 10.3 months.

◆"1%P Too Much" US Fed Leaning Away from ‘Giant Step’ Again... Market Bets Drop to 29%

Amid growing concerns that a recession risk could increase, there is renewed weight within the Fed toward raising rates by 0.75 percentage points rather than 1.0 percentage point at the upcoming Federal Open Market Committee (FOMC) meeting later this month. WSJ reported that the Fed is preparing for a giant step of a 0.75 percentage point rate hike.

The 1.0 percentage point hike gained momentum last week after the June CPI rose above 9%, with the rationale that a larger-than-expected increase was necessary to curb soaring inflation. Some Fed officials did not rule out this possibility. However, subsequent remarks from Fed officials have shifted the mood again, as concerns about rapid rate hikes potentially exacerbating economic slowdown have spread.

Raphael Bostic, President of the Federal Reserve Bank of Atlanta, mentioned at an event in Florida on the 15th that rapidly raising rates could unnecessarily expose weak parts of the economy. Esther George, President of the Kansas City Fed, also expressed caution about a 1% point hike, saying, "Rapid rate hikes pose the risk of tightening faster than the economy and markets can adjust."

Moreover, the easing of U.S. inflation expectations released on the 15th also contributed to favoring a giant step rather than a full 1% point hike.

The University of Michigan's inflation expectations index, which was expected to influence the Fed's tightening pace, declined. The one-year ahead inflation expectation dropped slightly from 5.3% to 5.2%. The long-term inflation expectation fell more sharply from 3.1% to 2.8%. Thomas Simons, an economist at Jefferies, predicted that the decline in inflation expectations increased the likelihood of a 0.75 percentage point rate hike this month.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market reflected over an 80% chance of a 1.0 percentage point rate hike on the day the CPI was released last week, but this has since dropped to around 29.1%.

Jay Bryson, Chief Economist at Wells Fargo, who had previously urged aggressive Fed tightening, said after the inflation expectations data release that the 1% point hike lost credibility, adding, "It will go up on the table, but reaching consensus or majority support for a 1.0 percentage point hike seems somewhat aggressive." Former Fed Governor Lawrence Meyer said, "The Fed has been relieved," and "I don't think they want to go as far as a 1.0 percentage point hike this month."

This content was produced with the assistance of AI translation services.