By Robert Eisenbeis, Ph.D.
At the FOMC’s post-meeting press conference Steve Matthews of Bloomberg suggested that Wall Street had become more confident in the prospects for a soft landing, and he wondered whether the staff or Chairman Powell had modified their views on the likelihood of a recession as opposed to a soft landing.
Remember that, in the minutes of the June FOMC meeting, the staff had concluded that the effects of previous tightening, combined with more restrictive credit conditions, would result in declines in real GDP in the fourth quarter of 2023 and first quarter of 2024 and yield a slight recession.
The staff also revised downward its growth projections for 2024 and 2025. This occurred before we learned about the increase in growth in Q2 2023 to 2.4% from 2.0% in Q1 2023 and before the staff had a chance to consider what appeared to be a stronger economy and more buoyant labor market in Q2.
Chairman Powell responded that “… my base case is that we will be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses that we’ve seen in some past instances, many past instances of tightening that look like ours.”
He said that this had been and continues to be his view. But what is really intriguing is that Chairman Powell also stated that “… the staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.”
We normally don’t know what the staff has forecast until the minutes are released, but the tidbit that Chairman Powell provided will make details provided in the minutes very interesting.
That staff forecast and the influence it has on at least the Board members as they form their own projections probably explain why the Committee had the confidence to pursue a further increase in rates in July.
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