U.S. will avert recession in 2023, Fed staff says, even as more rate hikes loom

Federal Reserve Chair Jerome Powell said Wednesday the central bank is nowhere near declaring victory over inflation but offered some good news: The Fed's staff believes the U.S. will avoid a recession in 2023.

The Fed raised interest rates for the 11th time since March 2022 to their highest level in more than two decades to kill inflation, and central bank officials are cautioning that there might be more hikes on the way. Powell told reporters that the process of taming price spikes has “a long way to go,” which could mean increases in the unemployment rate and slower wage growth.

Even so, staff economists at the central bank, who brief policymakers before interest rate decisions, no longer think an economic contraction is the most likely scenario this year. They had raised the odds of a slump after multiple banks failed in March.

“Given the resilience of the economy recently they are no longer forecasting a recession,” the Fed chief said at his press conference.

While no one can say with any certainty what might happen over the next several months, the shifting forecast underscores how much inflation has come down over the past year — dropping to 3 percent in June from the previous year — even as unemployment has remained essentially flat.

The issue is whether this forecast merely shifts the timing of a recession into next year, or if the Fed can achieve a so-called soft landing, where the economy can avoid a recession even as growth slows — a crucial question for President Joe Biden heading into the election year.

“I wouldn't use the term ‘optimism’ about this year," Powell said. "I would say there's a pathway to a soft landing.”

The Congressional Budget Office in new projections also estimated that the U.S. would avoid recession entirely — projecting the economy will slow to a 0.4 percent annual rate before rebounding.

Fed policymakers have not forecast a recession during this interest rate hike campaign, although they projected a jump in unemployment that could be consistent with one.

Indeed, the prospect of further rate hikes still hangs over the outlook. The central bank's rate-setting committee will assess how much borrowing costs are already crimping growth “in determining the extent [to which further rate hikes] may be appropriate,” it said in a statement after meetings this week.

“I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted,” Powell said. “And I would also say it's possible that we would choose to hold steady at that meeting.”

The stock market and the Biden administration are both eager to celebrate the slate of positive economic data. But central bank officials are worried about key industries — mainly services like restaurants, hospitals and auto insurance — where prices are climbing faster. They are also weighing the risk that, if they let up, inflation might begin to accelerate once more.

They'll get another snapshot this week of how much rate hikes have been digging into growth when the Commerce Department puts out a preliminary estimate Thursday on how much GDP increased from the end of March to the end of June.

And on Friday, the Labor Department will offer a quarterly update on how much companies are spending on workers — a data point that Fed Chair Jerome Powell watches closely to determine how much a hot job market is contributing to inflation.

Katy O'Donnell contributed to this report.