Fed chairman Jerome Powell hints at a likely US recession in 2025

The US economy is showing signs of recession despite the healthy 3 per cent growth of GDP in the second quarter of the current year. While the recession is not so impending, persistent inflation could lead to a recessionary situation, Jerome Powell, chairman of the board of US Federal Reserve, said during a news conference.

He said the Fed has taken note of this and has signaled likely cuts in interest rates to pump prime the economy by sustaining consumption and investment.

Powel cited historically proven indicators such as persisting inflation that continues to rise materially, or recession that is on the way, to seriously consider the likelihood of a recession in 2025.

With rising inflation, people cut back both saving and consumption, which would affect production and investment, slowing growth.

A rise in unemployment inevitably results in a reduction in spending and slow growth. He cited the July 2024 Employment Situation Report that showed a rise in unemployment rate to 4.3 per cent against 3.5 per cent a year ago.

Disinflation will help preserve labor market strength, but it would be possible only with anchored inflation expectations – the confidence that central bank policies will bring about 2 per cent inflation over time. This has been and continues to be the backbone of Federal Reserve’s monetary policy, Powel pointed out. 

He said an analysis by the New York Federal Reserve using the yield curve metric has suggested that there is a 50 per cent chance of recession in the next 12 months.

But, he added that the pandemic has altered all economic calculations and there is much to be learned from the pandemic days. 

Bond yields may not connect and these may not be true reflections of inflation expectations.

In this context, he said, there is a need to review long term policies at least in every five years and Fed will begin the process later this year.