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Federal Reserve likely to push aside recession worry in unveiling 2021 view
[ATLANTA] While investors have been increasingly worried about the potential for a US recession by 2020, central bankers next week are likely to project the nine-year-old expansion lasting a few more years.
Federal Open Market Committee participants at the close of a two-day meeting on Sept 26 will give their first projections for growth, inflation and the target interest rate for 2021. Their forecasts are likely point to slowing growth but no downturn, Deutsche Bank AG economists led by Peter Hooper in New York argue in a report Thursday.
"The Fed has never been able to achieve a soft landing from below, that is, return unemployment back up to its natural rate without causing a recession," they wrote in a report. "While we expect growth to slow in 2020, at the risk of declaring that ‘this time is different', we think the Powell Fed has a reasonable shot at making history by achieving a soft landing."
Officials including James Bullard of the St. Louis Fed and Raphael Bostic of the Atlanta Fed have worried about the potential for an inverted yield curve - short term rates higher than long-term rates - could be a signal for an upcoming downturn as the inversion has preceded recessions in recent history.
Ray Dalio, who founded Bridgewater Associates, the world's biggest hedge fund, this month predicted the US economy is about two years from a downturn.
Former Fed Chairman Ben Bernanke shared that view of a possible decline in 2020, when fiscal stimulus wanes like "Wile E. Coyote is going to go off the cliff."
The longest US expansion lasted 10 years, from 1991 to 2001, so FOMC forecasts are already predicting a record.
The Deutsche Bank economists say they are interested in whether the FOMC sees interest rates falling back in 2021.
The Fed in June projected it would raise rates to 3.4 per cent in 2020 - half a percentage point above its median estimate of the long-run neutral rate - to slow growth. A soft landing might imply slowing growth as well as rates dropping back a little.