Powell sees US skirting recession

US Federal Reserve chief Jerome Powell reckons the American economy can skirt recession. But the odds are stacked against him due to the banking scare, politics, and even the weather.
In Powell’s view, the strength of labour markets on display again in jobs data published on Friday, which showed a bumper increase last month, is smoothing the way for a soft landing, even after five percentage points of interest rate hikes in little over a year. “It’s possible that this time is really different,” Powell said last week after raising rates for a10th straight time.
Still, a labour market that remains too-hot-to-handle means the Fed will have to hold rates higher for longer to quell inflation — the very reason recession risks are so high. And for Powell’s forecast to come true, the US economy will have to overcome three major obstacles, all pointing to a downturn in the second half of this year.

And if this trifecta does tip the economy into a slump, there may not be much that Powell and his colleagues can do about it. Rate cuts are the main recession-fighting tool but it’s tricky for the Fed to deploy them when it’s still struggling to bring inflation back to target.
In Washington, meanwhile, the debt-ceiling standoff is escalating toward something that looks more dangerous than past episodes. US treasury secretary Janet Yellen sent a blunt warning to US lawmakers on May 1: Her department’s ability to use special accounting manoeuvrers to stay within the debt limit could be exhausted as early as the start of June.
If growth does start to slide, sticky inflation will limit the Fed’s room to respond.
It’s tough to make either soft landing or rolling recession the base case. The latest reading from Bloomberg Economics’ recession probability model suggests that a downturn starting by July is a near certainty.
Put the pieces together, and stagflation with the economy contracting and inflation still too high is the likeliest outcome.