all this indicates A path could emerge for a surprising – if still unlikely – scenario: that Fed Chair Jerome Powell will manage to calm inflation without triggering a recession, or at least achieve a “very mild” recession. For what President Joe Biden says is possible.

“It’s not a lost cause,” Goldman Sachs chief U.S. economist David Mericle said in an interview, adding that he thinks the Fed leadership holds the same view. “A recession is not inevitable. There is risk, more risk than usual, but we are making pretty good progress so far.”

For Biden, avoiding a recession would be a welcome reprieve after more than a year of being battered by Republican accusations that he stoked inflation with his big-spending policies. It could also give Democrats a big boost as the 2024 election campaigns get underway.

Optimists argue that economic growth has already slowed enough to cool the job market, slow wage growth, and ultimately slow prices. That, they say, could prompt the Fed to halt its rate-hike campaign — something the central bank has indicated it is likely to do in the first half of the year — without massive layoffs. Indeed, data released Thursday by payroll processor ADP showed that while job growth remains strong, wage growth is beginning to slow.

For most analysts, though, it’s still a long shot. In a recent Bloomberg poll, economists said their chances of a recession this year were 7 in 10 — double the number six months ago. The tech industry has been an early victim of the Fed’s inflation battle, with giant corporations from Amazon to Facebook laying off thousands of workers in what could be a precursor to what other industries will face in the coming months. And the central bank has often failed to avert recession in the past by raising interest rates.

The looming threat of a recession will continue to loom large on the legislative agenda of the new Congress and could make or break Democrats’ chances of staying in the White House in the next election.

That’s because Powell isn’t just looking to reduce price increases; He has vowed that the central bank will not hesitate to cause a recession if it does so to bring inflation back toward the Fed’s target of 2 percent, about a third of what it currently is. And the central bank has already taken steps to raise borrowing costs – it raised its benchmark interest rate from near zero to above 4 percent last year – could pack a huge punch this year as consumers reduce their savings. Taxes and companies apply brakes. hiring.

Still, Goldman Sachs is not alone in saying that the US does not need to suffer such severe losses. In a Wall Street Journal poll, JPMorgan Chase, Morgan Stanley, Credit Suisse and HSBC also said they expect the US to avoid recession, even though most other banks disagreed.

And even if there is a recession, many experts say it could look more like flatlining rather than a noticeable decline in economic activity.

“Don’t put a capital ‘R’ on this,” said Mickey Levy, chief economist for the Americas and Asia at Berenberg Capital Markets. “You and anyone else are going to barely know the difference between real GDP that decreases by half a percent and that increases by half a percent. It’s almost imperceptible.

Lower gas prices have helped improve consumer sentiment, with Americans registering their highest level of optimism in seven months in December, according to the Conference Board’s monthly survey. Still, consumer expectations are bearish.

Conference Board chief economist Dana Peterson warned that it may not be possible to beat inflation without some kind of recession, and she predicts a mild recession. After all, rising consumer spending and a low unemployment rate are part of what keeps prices rising.

“If consumers continue to decide they want to continue spending, the Fed will have to do more and cause a recession that is deeper and longer,” she said. “The Fed is saying, ‘Well, maybe you don’t need massive layoffs, you just need companies to pull ads to help them.’ But you need to pull consumers back at your expense.

Goldman’s Mericle is more optimistic. He said there is actually a way to slow economic growth to bring down inflation without causing widespread pain in the job market.

“Impact on the Economy” [from the Fed’s rate hikes] We need to maintain on this low growth path,” he said.

Stocks had a terrible year in 2022, but investors are pushing back against the Fed’s efforts to keep the market down as part of its fight against inflation. The central bank’s policymakers warned that “unwarranted” optimism from markets in the form of higher prices on bonds and lower rates could complicate their effort to reduce inflation, according to minutes of their December meeting released on Wednesday. .

But “if markets become more pessimistic and financial conditions tighten, the Fed may not need to do as much,” Mericle said.

Central bank policymakers don’t know whether inflation will continue to fall sharply without doing more damage to US jobs and income. Powell himself has repeatedly stated that wage increases are growing faster than they can keep pace with 2 percent inflation, as higher prices also motivate employees to seek higher wages.

But the same dynamic can also work in the opposite direction, Mericle said. That is, as inflation eases, employees may feel less of a need to push for bigger raises.

“Wage growth and inflation both affect each other,” he said. “It is quite possible that some of these deflationary impulses will appear, whether it is a reduction in gas prices or durable goods, that will impact on inflationary psychology, but this time for the better.”

Levy said the current economic situation is also unusual in that it could bode well for a so-called soft landing, where the economy cools enough to reduce inflation, but not enough to cause a sharp jump in unemployment. .

“During a typical end of an expansion, businesses have become overconfident, and they’ve hired too many people and they’ve built up their inventories too much,” he said. So as growth slows, “they have to cut production and employment not only to meet slowing demand but also to clear house.”

But this time, the lack of supply has hindered firms’ ability to meet demand on both fronts, Levy said, meaning they would rather cut their profit margins than lay off workers and curtail production. can decide to do.

“The business still has deficits and so you don’t need to curtail those excesses,” he said.

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