US Fed projects ‘mild’ recession this year over banking turmoil

Staff economists at the United States Federal Reserve (Fed) have projected that the recent banking turmoil will trigger a “mild recession” later this year.

Following a crisis of confidence in banks, New-York based Silicon Valley Bank and Signature Bank collapsed last month.

According to minutes of the March 21 to 22 meeting of the federal open market committee, released on Wednesday, the Fed projected that recovery from the mild recession will take effect over the subsequent two years.

“For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market,” the report reads.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”

The regulator said real GDP growth in 2024 is anticipated to remain below the projected potential output growth, but GDP growth in 2025 is expected to exceed that potential.

“The staff judged that the uncertainty around the baseline projection was much greater than at the time of the previous forecast,” the Fed said.

“In particular, the staff viewed the risks around the baseline projection as determined importantly by banking conditions and the implications for financial conditions. 

“If the effects of the recent developments in the banking sector on macroeconomic conditions were to abate quickly, then the risks around the baseline would be tilted to the upside for both economic activity and inflation.

“If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for both economic activity and inflation, particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.”