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Fed economists project recession this year, in potential blow to Biden

Federal Reserve Chair Jerome Powell speaks during a news conference.

Federal Reserve economists believe that recent banking turmoil will trigger a mild recession later this year, a potentially ominous sign for President Joe Biden as he heads into an election campaign.

Staff members at the central bank, who brief policymakers before interest rate decisions, had long expected GDP growth to slow this year in the wake of the Fed’s fight against inflation. But last month they upped the odds of a downturn, according to the minutes of the Fed’s March 21-22 meeting.

Just a couple of weeks before the meeting, two regional lenders — Silicon Valley Bank and Signature Bank — collapsed after depositors pulled out billions of dollars in cash, sending tremors throughout the industry.

Their projection was for “a mild recession starting later this year, with a recovery over the subsequent two years,” according to the minutes, released Wednesday. That would spark a jump in unemployment. They estimated the economy would fully recover by 2025.

The economic outlook is always difficult to foretell with any confidence, and staff members underscored their uncertainty at the meeting. If banks don’t pull back on lending as much as they expect, then the economy might not suffer as much. But if the financial system were to face even more stress, then the prognosis could be much worse.

“Historical recessions related to financial market problems tend to be more severe and persistent than average recessions,” staff noted, according to the minutes.

For their part, officials with an actual say in rate policy aren’t quite forecasting a recession. At the March meeting, their median projection was for the U.S. economy to grow 0.4 percent — a rate so slow that it could easily dip negative. Meanwhile, they expect unemployment to rise roughly a percentage point, conditions that would be consistent with an economic contraction.

Fed officials expect the recent string of bank failures to lead cash to flow less freely through the economy as lenders are less willing to part with it, something Chair Jerome Powell has noted could act as essentially another rate hike.

Central bank policymakers are considering whether another rate hike will be needed when they meet next in May, or if borrowing costs are high enough for now to bring inflation down over time.

Members of the Fed’s rate-setting committee said in March “that it was too early to assess with confidence the magnitude of the effect of a credit tightening on economic activity and inflation, and that it was important to continue to closely monitor developments,” according to the minutes.


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