Federal Reserve Chair Jerome Powell reckons the US economy can skirt recession. But the odds are stacked against him—thanks to banking, politics, and even the weather.
A looming credit crunch. Driven by the combined impact of Fed tightening and bank failures, it will likely hit small businesses and commercial real estate especially hard. The fastest monetary tightening in four decades was always going to come at a price. The Fed has jacked up rates from near-zero to above 5 percent since March last year. In recent history, the number of cases when that kind of policy didn’t lead to recession is precisely zero.
If Fed officials could choose, though, they would probably not have picked collapsing regional banks as their preferred mechanism for delivering disinflation. Treasury Secretary Janet Yellen sent a blunt warning to US lawmakers on May 1: her department’s ability to use special accounting maneuvers to stay within the debt limit could be exhausted as early as the start of June. The Treasury has been ducking and weaving to avoid default since hitting the current statutory limit of $31.4 trillion in January.
Bloomberg Economics forecasts that rising wages, and the end of the disinflationary impulse from goods and energy, will leave core inflation stuck around 4 percent the end of this year. And it could be worse. The National Oceanic and Atmospheric Administration projects a 62 percent chance of the extreme weather system developing between May and July, rising to 80 percent by the fall. A strong El Niño, as some models predict, could add to inflation.
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