Such grim forecasts offer the possibility that the economy could end up shrinking this quarter for the second time in a row — a common, though unofficial, definition of a recession. The National Bureau of Economic Research, the country’s semiofficial arbiter of when business cycles begin and end, offers a more nuanced definition of a recession, calling it “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” Most economists agree that, by that definition, a recession has not yet begun.
Mr. Powell on Wednesday argued, as he has in the past, that the Fed can bring down inflation without causing a recession, although he acknowledged that its ability to do so depends on factors that are outside its control, such as gas prices, the pandemic and the war in Ukraine. Many analysts are skeptical that such a “soft landing” is realistic. After Mr. Powell’s comments, economists at Deutsche Bank called such hopes “overly optimistic.”
Even if the Fed succeeds, however, that doesn’t guarantee a quick recovery for markets. Inflation is likely to come down only slowly. Fed officials themselves think it will remain elevated at least through the end of the year. The economy, however, could slow relatively quickly. Europe, which was experiencing slower growth even before Russia invaded Ukraine and has been hit even harder by the spike in energy prices, is particularly vulnerable to such a period of “stagflation” — a portmanteau of the words stagnation and inflation, used to describe periods of high unemployment and rising prices.
Analysts say the stock market isn’t likely to regain its footing until there are clear signs that inflation is starting to come under control, which in turn would take pressure off the Fed to raise rates quickly. Stocks briefly rallied in late May, ending a seven-week losing streak, as data seemed to show that gains in consumer prices had peaked. But the selling began again last week after a new report on the Consumer Price Index showed that inflation accelerated again, jumping 8.6 percent in May from a year earlier.
“Not until it is clear that the U.S. has seen peak inflation are concerns about the trajectory of Fed hikes likely to ease significantly,” Jane Foley, a strategist at Rabobank, wrote in an email. “Meanwhile, the market sentiment is likely to remain scarred.”
The last time the Fed had to raise rates rapidly to control inflation, in the late 1970s and early 1980s, it caused what was at the time the worst recession since the Great Depression. But economists are optimistic the pain this time won’t be nearly as severe, partly because inflation hasn’t yet become endemic.
Still, Mr. Bryson noted that recessions, once they begin, often prove hard to escape.
“Knock on wood you don’t have to go through the same depth of a recession that we did in ’81, ’82 to wring inflation out of the economy today,” he said. “The problem though is the stresses of an economic downturn often bring out imbalances that up until that time were largely undetected.”
Jason Karaian contributed reporting.