What will the next economic recession look like?

A recession is hard to predict, but consensus is growing among major banks and leading economists that deflation is coming with Federal Reserve It intensifies its war on inflation.

The Fed is hoping for the rarest of economic gains as it transitions into full-fledged inflation: cool consumer demand enough that prices stop rising, without crushing it so much that it sends the country into recession. Although Fed policymakers are counting on finding that elusive sweet spot — known as a soft landing — history shows that the US central bank often struggles with the successful thread between tightening policy and holding back. economic growth.

How the Fed Mistaken the Blow Drying Mark

Bank of America, Deutsche Bank, Wells Fargo and Goldman Sachs are among the most prominent predictors of the possibility of a recession over the next two years, as the US central bank moves to tighten monetary policy aggressively in order to calm consumer demand and bring in inflation. It falls back to its 2% target.

While the economy is still fairly strong at the moment, there are increasing signs of that Wall Street It may be true: US economic growth is already slowing, the Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly contracted in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still at The depths of the COVID recession.

A pedestrian walks past a used car dealership in Miami, Florida on January 12, 2022. (Photo by Chandan Khanna/AFP via Getty Images/Getty Images)

Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, low incomes, and slow retail sales. But they differ greatly in how they actually appear, which is equally difficult to predict.

Recent research from Alan Blinder, former Federal Reserve Vice Chair and Princeton economist specified 11 Fed tightening cycles since 1965, followed by eight recessions. Most of the downturns were very mild: There were five cases where GDP fell by less than 1%, or there was no economic downturn at all.

What is a recession, and should Americans worry?

“Are we going to get stuck in a recession? Maybe,” Blinder wrote in a recent editorial in the Wall Street Journal. “The odds were probably higher than 50% even before [first quarter] GDP report. But it is important to note that no recession should be deep and prolonged, unlike the recession of the 1970s and early 1980s.”

The top Wall Street economists predicted a downturn – Deutsche Bank strategists, led by Matthew Luzzetti – a recession starting next April as a result of the Fed’s efforts to tame inflation. But the team said it’s likely to be “moderate,” very different from those Americans experienced in 2008 and 2020. This might look like several years of anemic growth, or a very short recession in which GDP doesn’t fall much as it recovers. The economy is relatively fast.

The Fed has already voted to raise its short-term interest rate by 50 basis points in May and has indicated that increases of a similar size are on the table at upcoming meetings as inflation remains near a 40-year high. Higher interest rates tend to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.

Fed Chair Jerome Powell has reiterated these sentiments in recent public forums and promised that the Fed would raise interest rates as high as needed to calm prices.

A man wearing a mask walks past the US Federal Reserve building in Washington, DC, United States, on April 29, 2020. (Xinhua/Liu Jie via Getty Images)/Getty Images

“What we need to see is inflation coming down in a clear and convincing way and we will keep pushing until we see that,” he said last month during a Wall Street Journal live event. “If it involves exceeding widely understood levels of neutrality, we will not hesitate at all to do so.”

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Of course, some economists are more pessimistic about the outlook. JPMorgan Chase CEO Jimmy Damon He warned of a looming economic “hurricane” this week, citing concerns about high interest rates, inflation and the war in Ukraine.

“I said there are storm clouds. But I will change it. It’s a hurricane,” he said during a conference hosted by AllianceBernstein Holdings. “Right now it’s kinda sunny, things are going well, everyone thinks the Fed can handle it. This hurricane is right there on the road coming our way. We don’t know if it’s a little or a super storm Sandy. You better show it.” yourself.”