Ex-Fed insider: Full-blown recession ‘almost certainly’ coming

The problem is that the Fed started its quest to control inflation late, leaving the central bank no choice but to tighten the brakes on the economy by drastic rise in interest rates.

“There will almost certainly be a full-blown recession. If we’re not there yet, I think we will be in the next 12 months,” said Dudley, the former chairman of the New York Federal Reserve. , to CNN by phone. interview.

Although Dudley concedes that the US economy has clearly slowed, he doesn’t think it has weakened enough to qualify as a recession – at least not yet. He pointed to “too strong” growth in payrolls and factory activity.

“It’s not wide enough or deep enough,” Dudley said of the slowdown. “What we’ve seen so far is not enough on its own to be a recession.”

The the unemployment rate remains at 3.6%near the lowest levels of the last half-century.
However, if the economy continues to weaken later this year, Dudley said it’s possible the National Bureau of Economic Researchofficial arbiter of recessions, will determine that a recession began early this year.

Soft or hard landing?

Federal Reserve officials insist they can still pull off a so-called soft landing – getting inflation under control without triggering a recession.

Despite a series of interest rate hikes, the job market continues to grow steadily, albeit at a somewhat slower pace.

“We believe there is a way for us to bring inflation down while maintaining a strong labor market,” Federal Reserve Chairman Jerome Powell said at a news conference. press conference thelast week.

Still, Powell admitted the task had become trickier.

“We know the path has clearly narrowed, due to events beyond our control,” he said. “And it could shrink even further.”

Dudley: “They’re late”

The Powell-led Fed raised interest rates last week by three-quarters of a percentage point in its second straight meeting.

Dudley said part of the challenge for the Fed stems from its own lackluster forecast: The central bank only started raising interest rates when inflation was already very high.

“They started off very slow,” Dudley said. “They’re behind and that means they have to do more. And that increases the risk of a recession. I think a recession is very likely, and I’ll be very, very surprised if they avoid a recession.”

Here's why gas prices are falling

The good news is that Dudley is betting that any impending recession would be “mild” in terms of the depth of the decline, as corporate and household balance sheets are in good shape.

He warned, however, that continued high inflation means the Fed may not be able to quickly come to the rescue with interest rate cuts aimed at stemming a slowdown.

“It could last longer because the Fed may not be able to release the brakes too quickly,” he said.

Does Wall Street misunderstand the Fed?

Others are a bit more optimistic.

S&P Global Ratings predicts a roughly 45% chance of a recession over the next 12 months.

“Whether the United States can avoid a recession is a challenge,” Beth Ann Bovino, S&P’s chief U.S. economist, wrote in a report on Wednesday.

US markets have soared since last week’s Fed meeting as investors seized on potential hints from Powell that the central bank may soon be able to slow the pace of its rate hikes.

Stocks have continued to rally despite a flurry of comments this week from current Fed officials signaling that the war on inflation is far from over.

Dudley warns that investors are misinterpreting Fed signals, adding that he was “a little puzzled” by the market’s reaction.

“The Fed is still far from the labor market room it needs and the 2% inflation target,” he said.

Mortgage rates fall below 5% for the first time since April

Dudley added that another three-quarters percentage point rate hike is still “potentially in play,” depending on how the economy plays out. He expects the Fed to raise interest rates to 4% or more from 2.5% today.

All of this goes against the enthusiasm of Wall Street.

The S&P 500 ended Wednesday at its highest level in nearly two months, while the Nasdaq jumped to levels not seen since early May.

Dudley warned that the rising stock market could be counterproductive as it translates into easier financial conditions. And it’s exactly the opposite what the Fed wants as it tries to control inflation.

“Ironically,” Dudley said, “the big rally in financial markets is increasing the pressure on the Fed to do more.”

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