History shows that once our recession forecast model reaches current levels, aggressive policy can delay recession, but not avoid it.

Recession Outlook Summary

  • Historical evidence on the Federal Reserve’s skill in using rate cuts to avoid recession is mixed. This time around, numerous headwinds combined with limited policy space globally mean it is a close call as to whether the Fed has cut early enough to help extend the expansion.
  • The odds of a recession both in the near and medium term rose in the second quarter. This trend continued in the third quarter, according to our preliminary estimate, with our Recession Probability Model showing a 58 percent chance of the economy being in a recession by mid-2020, and a 77 percent chance of a recession beginning in the next 24 months.
  • History shows that once our recession forecast model reaches current levels, only aggressive policy action can delay recession, but not avoid it.
  • We expect the Trump administration will continue to use easier monetary policy as a green light for more aggressive trade policy. Fed Chair Jerome Powell explicitly cited trade policy as a rationale for cutting rates, which risks the development of a feedback loop between Fed rate cuts and trade war escalation.
  • If core inflation heads back up toward 2 percent, some Fed officials may more forcefully resist further rate cuts, complicating an already difficult messaging exercise.
  • Incoming data support our longstanding baseline of a recession beginning by mid-2020, per our Recession Dashboard. Given that credit spreads are still relatively tight on a historical basis, we continue to believe it is prudent to remain up in quality as we await better opportunities to deploy capital in riskier credit sectors in the coming downturn.

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