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During its June meeting, the US Federal Reserve discussed the potential of a mild recession and expressed concerns about the GDP growth rate falling below projections.
The released minutes of the June Federal Open Market Committee (FOMC) meeting shed light on the challenges ahead. The forecast highlighted the possibility of a mild recession later this year, attributed to the tightening of bank credit conditions and the already tight financial conditions. However, the staff also acknowledged the uncertain nature of the current economic climate, recognizing the potential for slow but continued economic growth.
Based on the staff's projections, real GDP growth is expected to decelerate in the current and next quarters, with a modest decline anticipated in the fourth quarter of this year and the first quarter of the following year. Looking ahead, projections indicate that real GDP growth in 2024 and 2025 might fall below the staff's estimate of potential output growth. This suggests a potential struggle for the economy to reach its full potential in the coming years.
Concerns about the labor market were also evident in the forecast, with expectations of an increase in the unemployment rate this year, peaking next year, and remaining at elevated levels until 2025 in case the Federal Reserve interest rates remains high. It is anticipated that tight resource utilization in both product and labor markets will ease, resulting in a decline in real output compared to potential output by 2025. Furthermore, the staff predicted that the unemployment rate could surpass its estimated natural rate during that period.
In terms of inflation, the staff's projections remained relatively unchanged from previous forecasts. They noted that supply-demand imbalances in both goods and labor markets were easing at a slow pace. The forecast indicated that, on a four-quarter change basis, total Personal Consumption Expenditures (PCE) price inflation is projected to be 3.0 percent this year, with core inflation at 3.7 percent. Core goods inflation is expected to decrease further in the near term, while housing services inflation is anticipated to decline throughout the rest of the year. Core nonhousing services inflation is projected to gradually slow down as nominal wage growth eases.
Despite these projections, the staff emphasized the considerable uncertainty surrounding the baseline outlook. They highlighted the significant influence that developments in the banking sector can have on risks, which may turn out to be more or less negative than assumed in the baseline scenario. However, considering the strength of the labor market and resilient consumer spending, the staff considered the possibility of slow economic growth and avoiding a downturn to be nearly as likely as the mild-recession baseline.
In terms of inflation risks, the staff believed that the balance of risks tilted to the upside. They considered scenarios with higher inflation more likely than those with lower inflation, given the persistent elevated inflation and the potential for inflation expectations to become unanchored after a prolonged period of elevated price levels.
The FOMC minutes provide valuable insights into the Federal Reserve's thinking regarding the US economy. However, it is important to note that economic projections are subject to change based on evolving market conditions and policy decisions. The Federal Reserve remains vigilant in its commitment to promoting price stability and maximum employment, adjusting its policies as necessary to steer the economy on a sustainable path.