- Recent bank failures and turbulence throughout the banking system may trigger recession during the second half of 2023, leading to a 0.3% decline in gross domestic product for the full year, Fannie Mae said Friday.
- “Inflation has now been joined by financial stability concerns as threats to sustained growth,” Fannie Mae Chief Economist Doug Duncan said in a statement. “These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening — but this may well be the catalyst for the modest recession we’ve been expecting since April 2022.”
- The core Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation measure, will likely fall to an annual rate of 3.8% in December from 4.7% in January, Fannie Mae said. Fed officials, based on a median estimate released Wednesday, predict core PCE will end the year at 3.6% and the economy will expand 0.4% in 2023.
Fed policymakers raised the main interest rate by a quarter percentage point on Wednesday, stepping up their most aggressive fight against inflation in four decades despite the worst instability in the banking system since 2008.
Banking turmoil may lead to a further decline in stimulus that mimics an increase in the benchmark interest rate, Fed Chair Jerome Powell said in a press conference Wednesday.
“The events of the last two weeks are likely to result in some tightening credit conditions for households and businesses and thereby weigh on demand on the labor market and on inflation,” Powell said.
Tougher lending standards may slow economic growth by half a percentage point, impeding the expansion as much as a quarter-point or half-point increase in the federal funds rate, according to Goldman Sachs.
Expectations for a pullback in credit have solidified recession forecasts that preceded the failure of Silicon Valley Bank.
A pullback in lending by small- and mid-sized banks, along with sagging confidence among businesses and consumers, will likely lead to a downturn, Fannie Mae said.
“Many financial market observers and participants are arguing that a substantial recession is likely,” St. Louis Fed President James Bullard said Friday.
Yet the central bank still has leeway for achieving a “soft landing,” or reducing inflation to its 2% target without causing a downturn, he said in a speech.
“It appears that the Fed may be able to disinflate in an orderly manner and achieve a relatively soft landing,” Bullard said, adding that policymaker credibility is higher than during the last bout of high inflation during the 1970s.
Goldman Sachs puts the odds of recession at 45% to 55%.
The Fed remains committed to reducing inflation to its 2% target, Powell said Wednesday after the Federal Open Market Committee unanimously decided to increase the benchmark interest rate to a range between 4.75% and 5%.
“At the end of the day, we will do enough to bring inflation down to 2% — no one should doubt that,” he said, acknowledging the potential pain to businesses and households from reducing inflation to the Fed’s target.
“There are real costs to bring it down to 2%, but the costs of failing to do so are much higher,” Powell said.