Weak Stocks And A Banking Crisis Could Push US Into Recession In Late 2023: Fed Minutes Reveal Policymakers May Pause Interest Rates


Over the past year, the Federal Reserve has raised key short-term interest rates 8 times. This has led to many kinds of business and consumer loans becoming expensive. Now a majority of the nation’s policymakers and business economists expect a recession. It is feared that it could start as early as the third or fourth quarter of this year. This comes despite a series of reports that pointed to a surprisingly resilient economy despite high-interest rates. 

Around 50% of economists who responded to a survey by the National Association for Business Economics foresee recession to hit later this year. But a series of government reports have pointed to an economy that continues to be robust. This comes even after the Fed raised interest rates eight times in a strenuous effort to curb high inflation and slow growth. 

In January 2023 alone, employers added over half a million jobs and employment reached 3.4%. It is the lowest since 1969. Retail sales and sales reports from restaurants have revealed a jump of 3%. It is the sharpest monthly gain in over two years. 

This indicates that the consumer is still willing to spend and is financially healthy. It is the consumer who is a major force behind industrial growth and is still financially strong.

Conflicting Signals Raise Worries Of Recession

But worrying signs continue to emit from the economy. Several federal releases have indicated that inflation has risen again in January after cooling down for several months. This has again fanned fears that the Fed could push up the benchmark rate again, more than what was previously expected. 

When the Fed lifts its key rate, it typically leads to more expensive mortgages, credit card borrowings, auto loans, business interest loans, and most other forms of borrowing. 

Tighter credit can lead to a weakening economy and even lead to a much-feared recession. Recent economic research indicates that the Federal Reserve never managed to reduce inflation from the peak that it reached in 2022 without causing a recession. 

Minutes of the Federal Open Market Committee meeting reveal that several policymakers of the US central bank considered last month pausing interest rates. This followed the failure of two regional banks and a forecast by the Fed that the recession in the banking sector could tip the economy into another recession. 

The minutes of the Fed meeting that assessed the potential fallout in the banking sector, there is a strong possibility of a recession starting later in 2023. Its coils spill over into the next year with a recovery over the next two years, dragging on till 2025.

How The Us Economy Could Still Manage To Avoid Recession In 2023

A section of economists still claim that the probability of a recession over the next 12 months is a mere 35%. They said that the disagreement with the negative view arises from a more optimistic view on whether a recession is capable of taming inflation. They say that a continued period of below-potential growth in the economy can gradually rebalance the demand and supply in the labor market. 

It could also dampen price and wage pressures and lead to a much lesser increase in the unemployment rate than historical precedence would suggest. 

Further, while the Federal Reserve tightened financial conditions substantially in 2022, the impact on the growth of GDP is likely to diminish this year. And like other macro models, our analysis shows that the peak impact of rate hikes on GDP growth is front-loaded.

There is also a strong possibility that the gap between jobs and workers, the total labor demand, minus the total labor supply,     has fallen from a peak of 5.9 million to 4 million. 

Most of the decline in labor demand so far had come from a decline in job openings. This drop is much larger than any that has ever been seen outside a recession. 

And this gap between labor demand and total labor supply needs to shrink further to around 2 million. This will make it compatible with a more sustainable rate of wage growth. And the gap will surely go down steadily this year due to a further drop in job openings. It will also be due to a limited increase in the unemployment rate to just over 4%.

Even if there is a recession, the characteristics of this recession are likely to be quite different from prior ones. And experts have cited two major reasons – the state of household finances, like healthy saving rates and relatively low levels of debt, and the demand for labor which continues to be resilient. 

We are yet to witness the type of strong pullback that is usually seen at the onset of a recession. It is a time when normal businesses look to rapidly bring down costs. The pullback this time is likely to be softer and more gradual than in the past. Broad-based layoffs are unlikely to be a reality this time in the event of a recession. 

We are more likely to experience a rolling recession across various segments, including manufacturing and housing. The chances of the entire economy getting swept away by a full-fledged downturn seem unlikely at the moment. 

The recession version of no-recession talk is at the moment missing from the present talks. The situation is different this time from earlier recessions when things have either fallen apart or boomed at the same time. 

Strengths and weaknesses have continued to pass through specific sectors. So while the service industry may be affected, the housing industry has seen what could be considered a boom in recent months. The housing sector too was recently in the grip of a recession but has recovered at the moment. 

Thus, we are not seeing the first signs of an all-around recession at the moment. The typical sins are missing at the moment. Neither have we seen the severe pullback usually seen during an onset. It is hoped that the slowdown is temporary this time. 

In the stock market, the home builder section has done well, and so have industrial stacks. But experts have advised going for high quality while considering any investment opportunity.