Federal Reserve economists anticipate that current banking turbulence could cause a slight recession later this year, which might be a warning sign for President Joe Biden as he prepares to run for re-election.
GDP growth forecast this year, a potential blow to Biden. (Photo: Newsweek)
Fed Had Long Predicted GDP Growth Would Decrease This Year
Staff at the Fed who inform policymakers before interest rate decisions had long predicted that GDP growth would decrease this year as a result of the Fed’s fight against inflation. According to the minutes of the Fed’s March 21-22 meeting, they increased the likelihood of a downturn last month.
Only a few weeks before the meeting, two regional lenders — Silicon Valley Bank and Signature Bank — went bankrupt after depositors withdrew billions of dollars in cash, causing ripples throughout the industry.
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GDP Forecast May Result In Many Difficulties In The US Economy
According to the minutes, they predicted “a mild recession beginning later this year, followed by a recovery over the next two years.” This would result in an increase in unemployment. They predicted that the economy would be fully recovered by 2025.
The economic picture is often difficult to predict with certainty, and staff members expressed their concerns at the meeting. If banks do not reduce lending as much as expected, the economy may not suffer as much. However, if the financial system is put under any greater strain, the prognosis might be far worse.
“Historical recessions related to financial market problems tend to be more severe and persistent than average recessions,” staff stated in the meeting minutes.
Officials with actual say over interest rates, for their part, aren’t exactly anticipating a recession. At the March conference, their median forecast for the US economy was 0.4 percent growth – a rate so slow that it might easily become negative. Meanwhile, they anticipate a 1% increase in unemployment, which would be consistent with an economic recession.
Fed policymakers anticipate that the recent string of bank failures will cause cash to move less freely through the economy as lenders become less eager to part with it, which, as Chair Jerome Powell has remarked, might effectively result in another rate hike.
Central bank policymakers are debating whether another rate hike is necessary when they meet next in May, or if borrowing costs are currently high enough to reduce inflation 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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