Recession Is the ‘Most Likely Outcome,’ Alan Greenspan Says

Former Chairman of the Federal Reserve Alan Greenspan speaks about the state of the European and US economies during a discussion with Bloomberg Government at their offices in Washington, DC, June 27, 2016. (SAUL LOEB/AFP via Getty Images)

The United States slipping into a recession is the “most likely outcome,” according to former Federal Reserve chair Alan Greenspan.

Greenspan, who’s now senior economic adviser at Advisors Capital Management, said in a year-end question-and-answer commentary posted on the firm’s website on Jan. 3 that even a pivot by the central bank wouldn’t be “substantial enough to avoid at least a mild recession.”

Despite the past couple of inflation reports showing a deceleration in the pace of price hikes, he noted that “it does not change the fact that prices are still increasing.”

“Official inflation numbers could remain tame in the near term owing solely to the methodology by which they are measured, most notably housing costs,” Greenspan said. “However, I don’t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession. Wage increases, and by extension employment, still need to soften further for a pullback in inflation to be anything more than transitory. So we may have a brief period of calm on the inflation front, but I think it will be too little too late.”

Greenspan isn’t the only Fed alumnus to utter the dreaded r-word.

The U.S. economy is “pretty likely” to face a recession this year, but it might not be a significant downturn, according to former Federal Reserve Bank of New York President William Dudley.

While speaking in an interview with Bloomberg Surveillance on Jan. 3, Dudley acknowledged that a recession might occur because of what the central bank must do to rein in inflation.

“A recession is pretty likely just because of what the Fed has to do,” Dudley said. “But what’s different this time, I think, is that if we have a recession, it’s going to be a Fed-induced recession, and the Fed can end the recession by subsequently easing monetary policy.”

Dudley further noted that the institution would need to increase the unemployment rate to slow down the economy and return the Fed’s target inflation rate to 2 percent.

But nothing suggests that the United States faces “a big risk of a financial-instability cataclysm that pushes the economy into a deep recession,” he said.

Since March 2022, the Fed has raised the benchmark federal funds rate by 425 basis points, bringing the interest rate to a range of 4.25 to 4.50 percent, the highest level in 15 years. Despite the current rising-rate environment and weakening data, the central bank doesn’t anticipate a recession.

According to the Summary of Economic Projections, officials anticipate the gross domestic product (GDP) growth rate to be 0.5 percent in 2023, 1.6 percent in 2024, and 1.8 percent in 2025.

Fed Chair Jerome Powell told reporters at the post-Federal Open Market Committee meeting press conference in December 2022 that the United States would go through a period of “slow growth” and “well below trend.”

“It’s not going to feel like a boom; it’s going to feel like very slow growth,” Powell said.

Are There Recession Risks?

The growing base-case scenario among Wall Street firms and economists is that the economy will likely experience a recession this year.

A Wall Street Journal survey of economists at 23 financial institutions revealed that two-thirds of respondents say a recession will occur this year amid the Fed’s inflation-busting tightening efforts. A separate Bloomberg survey of economists found a 70 percent chance of the nation sinking into a recession.

But while a growing chorus of market analysts are predicting a downturn, many Americans think the country is currently in a recession.

According to a November 2022 Politico–Morning Consult poll (pdf), nearly two-thirds (65 percent) of respondents said the economy is already in a recession. Eighty-one percent of Republicans considered the economy to be in a recession, compared to 63 percent of independents and 51 percent of Democrats.

“A recession looks to be a four in five proposition by the end of 2023. The U.S. economy is facing big headwinds from surging interest rates, high inflation, the end of fiscal stimulus, and weak export markets abroad,” wrote Bill Adams, senior vice president and chief economist at Comerica Bank.

Jason Brady, president and CEO at Thornburg Investment Management, thinks a 2023 recession “is a foregone conclusion,” but “the question remains how intensely we experience a downturn.”

According to ING’s “Economic Outlook 2023,” recession risks are mounting as more businesses pull back, although households are “holding up well right now.”

ING economists say the real estate market downturn will impact the construction industry, creating a ripple effect for the retail sector. The slowing global economy will affect the manufacturing and service sectors.

“While the U.S. entered a technical recession in the first half of 2022, this was tied to legacy supply-chain issues which led to volatility in trade and inventories,” the bank stated. “A recession will feel much more ’real' this time around.”

Fitch Ratings anticipates the U.S. economy entering “genuine recession territory” in the second quarter.

“The projected recession is quite similar to that of 1990–91, which followed similarly rapid Fed tightening in 1989–90. Nevertheless, downside risks stem from nonfinancial debt-to-GDP ratios, which are much higher now than in the 1990s,” Olu Sonola, head of U.S. regional economics at Fitch, wrote in a note.

In 1989 and 1990, the Fed engaged in restrictive monetary policy to trim inflation, resulting in limited economic growth and a loss of confidence among businesses and consumers. As a result, the National Bureau of Economic Research (NBER) identified the eight months between July 1990 and March 1991 as a recession.