[Fed Mentioning Economic Downturn] Following Powell, Hints of Consecutive Possibilities... "Stock Market Also Mirrors the 1970s"

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. Federal Reserve (Fed) officials who have stepped back acknowledging the possibility of a recession are not limited to Chairman Jerome Powell. Senior Fed officials, who had been hopeful for a 'soft landing,' have also consecutively expressed concerns about a recession, signaling a changed atmosphere within the Fed. A report from inside the Fed even suggested that the probability of a recession over the next year slightly exceeds 50%.

◆As if on cue... Fed officials flood with 'recession' remarks

The most direct mention of the possibility of a recession came from Fed Chair Powell. On the 22nd (local time), appearing before the U.S. Senate Banking Committee, Powell acknowledged market concerns by stating, "While not the intended outcome, the possibility (of a recession) certainly exists."

This tone is markedly different from just a few days ago when he emphasized achieving a so-called soft landing?lowering inflation without cooling the economy. These remarks came amid a flood of reports, especially from Wall Street investment banks, indicating a rising probability of recession. The fact that the head of U.S. monetary policy acknowledged this possibility adds significant weight to the market.

Patrick Harker, President of the Philadelphia Federal Reserve Bank, also forecasted in an interview with Yahoo Finance that "we could have two more quarters of negative (growth)." Although Harker said he would not consider such consecutive negative growth quarters as a recession, the market typically defines a recession as two consecutive quarters of negative growth.

On the same day, Charles Evans, President of the Chicago Fed, said at an event, "If we think we can fine-tune this with tremendous precision, the truth is we do not have that capability."

Bloomberg News pointed out, "The Fed's claim that a soft landing is possible will be difficult to realize," adding, "Historically, the probability of recession is high. Past Fed tightening has been a factor in rising unemployment, and in every case where monetary tightening caused unemployment to rise by more than 0.5 percentage points, a recession occurred."

The Fed report released that day also confirmed recession concerns. Michael G. Gilli, Fed Chief Economist, stated that due to increasing imbalances in goods and services markets, the probability of a recession over the next year exceeds 50%. The chance of entering a recession within the next two years was presented as two-thirds. This estimate was based on analyzing four variables: unemployment rate, inflation, the spread between Treasury and investment-grade corporate bond yields, and the spread between short- and medium-term Treasury yields. Chief Economist Gilli noted, "Historically, high inflation and low unemployment have preceded recessions."

◆Inflation and stock market mirror the 1970s

Concerns about recession are directly impacting the stock market, which has already entered a bear market. The S&P 500 index has fallen by 21.11% so far this year, and if the current trend continues, the decline in the first half of the year is expected to be similar to the period immediately following the 1970 oil shock. Both the stock market and inflation are being compared to the stagflation of the 1970s.

Moreover, warnings have emerged that if the Fed fails to control inflation, the stock market could fall an additional 33% due to a 1970s-style inflation shock. Soci?t? G?n?rale stated in a report, "During typical recessions, the S&P 500 index falls by an average of 33%," adding, "The current 24% decline implies a 72% probability of recession."

Citigroup raised the global recession probability to 50% on the same day. Christian Sewing, CEO of Deutsche Bank AG, also stated, "The probability of a global recession is 50%."

However, Fed officials reaffirmed their commitment to continue aggressive tightening to curb inflation despite these recession concerns. Chair Powell said, "We are strongly committed to controlling inflation," adding, "We will continue raising interest rates until we see clear evidence that inflation is slowing toward the Fed's 2% target." While acknowledging the possibility of a recession, he added that the probability is not high.

President Evans also agreed with the view that monetary easing should be removed quickly and supported the so-called 'giant step' of raising rates by 0.75 percentage points at once. Following the Fed's giant step this month, another increase of 0.5 or 0.75 percentage points is anticipated in July.