Fed economists believe a mild recession is coming which would be bad news for Biden

AP Photo/Alex Brandon

The minutes from last month’s Federal Reserve meeting were released today and they reveal that staff economists at the meeting believe a mild recession is on the way. Politico reports that could be bad news for Joe Biden.

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Federal Reserve economists believe that recent banking turmoil will trigger a mild recession later this year, a potentially ominous sign for President Joe Biden as he heads into an election campaign…

Their projection was for “a mild recession starting later this year, with a recovery over the subsequent two years,” according to the minutes, released Wednesday. That would spark a jump in unemployment. They estimated the economy would fully recover by 2025…

For their part, officials with an actual say in rate policy aren’t quite forecasting a recession. At the March meeting, their median projection was for the U.S. economy to grow 0.4 percent — a rate so slow that it could easily dip negative.

If there’s a silver lining here it’s that we may finally be getting to the end of rate hikes. CNBC adds that some members were leaning toward a 1/2 point rate hike but changed their minds in light of the banking problems we saw last month.

Several policymakers questioned whether to hold rates steady as they watched to see how the crisis unfolded. However, they relented and agreed to vote for another rate hike “because of elevated inflation, the strength of the recent economic data, and their commitment to bring inflation down to the Committee’s 2 percent longer-run goal.”

In fact, the minutes noted that some members were leaning toward a half-point rate rise prior to the banking problems. Officials said inflation is “much too high” though they stressed that incoming data and the impact of the hikes will have to be considered when formulating policy ahead…

Markets as of Wednesday afternoon were assigning about a 72% chance of one more quarter percentage point rate hike in May before a policy pivot where the Fed cuts before the end of the year, according to CME Group data.

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As you’d expect, the market reacted poorly to predictions of a recession:

Early gains faded and U.S. equities ended lower as the Labor Department’s latest report on consumer prices showed core inflation remained elevated, and the Federal Reserve meeting minutes revealed that members anticipated a mild recession this year because of the fallout from last month’s banking turmoil. The Dow, S&P 500, and Nasdaq all dropped.

Today Bloomberg is pointing to another problem which could increase the chances of a recession. OPEC seems intent on raising oil prices:

The Saudi-Russia oil alliance has the potential to cause all kinds of trouble for the US economy — and even for President Joe Biden’s re-election campaign. This month’s OPEC+ decision to cut crude output, for the second time since Biden flew to Saudi Arabia last summer seeking an increase, may be just the start.

That April 2 announcement, which lifted oil prices by about $5 a barrel, already means recession risks are bigger than they otherwise would have been — because consumers spending more on energy will have less cash left for other stuff — and inflation will be higher. Russian President Vladimir Putin, meanwhile, gets a bigger war-chest to fund his attack on Ukraine.

The article goes on to suggest that for both Saudi Arabia and Russia an oil price of about $100 a barrel would be ideal. That would allow the Saudis to balance their budget and have money left over for major new projects. Russia would also be able to balance its budget and shrug off sanctions if oil hit that price. So there’s plenty of incentive to make it happen. So much for the fist bump.

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Politically, this all seems like bad news for Joe Biden. Remember how low his poll numbers were last year when gasoline prices spiked? How about a repeat of that followed by a recession? Obviously a full recovery by 2025 would be great news for the next president but a lingering recession won’t be great for the current one who is (probably) going to be running for reelection next year.

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