The Fed Sure Sounds as If It Expects a Recession

Well, that was quick. In just more than a week, US Federal Reserve Chair Jerome Powell has gone from expressing confidence that policy makers will be able to avoid pushing the economy into a recession while rapidly raising interest rates to control inflation to remarking, as he did on Thursday, that a downturn is out of the central bank’s control.

At a press conference on May 4, after the Fed raised its target rate for overnight loans between banks by half a percentage point in the biggest increase since 2000, Powell told reporters that “it’s a strong economy” and nothing suggests “it’s close to or vulnerable to a recession.” Contrast that with comments he made Thursday in an interview with Marketplace public radio, where he said, “The question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.” The factors Powell cited included geopolitical events (the war in Ukraine) and supply chain bottlenecks (China’s Covid-19 lockdowns).

Pointing out this seemingly less confident tone by Powell in such a short period — and on the day the Senate confirmed him in a bipartisan 80-19 vote to another four-year term — isn’t a criticism of him or his colleagues, who are often derided as being behind the curve when it comes to steering the economy through difficult times. Rather, it underscores just how rapidly the economy is deteriorating.

As we know, the economy unexpectedly shrank in the first quarter at an annualized rate of 1.4%. It was the first contraction since the early days of the pandemic in 2020. Economists are increasingly convinced that the slowdown wasn’t an anomaly. Bloomberg News’s monthly survey of more than 70 economists released Friday showed that they slashed their forecasts for the annual increase in gross domestic product to 2.7% from 3.3% in April’s poll and 3.6% in March. It was 3.9% heading into 2022. It doesn’t take a mathematician to conclude that the trend isn’t the economy’s friend.

If that wasn’t concerning enough, economists also put the odds of a recession happening within one year at 30%. If that seems manageable and not such a risk, consider that it’s almost double the average of 17% between the end of 2009 and the start of 2020. On-the-ground data only confirms the weakening. The US freight industry is suffering; Cass Information Systems Inc. said this week that transport volumes slowed for a second consecutive month in April, dropping a seasonally adjusted 3.5% from March. “After a nearly two-year cycle of surging freight volumes, the freight cycle has downshifted with a thud,” Cass said in a statement.