Hold off on the panic — yes, the R-word has been creeping up in prediction markets, but let’s not call it just yet. The stock market took a nosedive, only to keep sinking in the following weeks, but Powell’s magical “Good afternoon” on Wednesday seemed to defibrillate the markets back to life.
Yes, Powell said the “R” word, just as expected. But let’s look at what he actually said:
“There’s always an unconditional probability of a recession. It might be broadly in the range of one in four at any time,” Powell remarked, adding that the Fed does not forecast recessions, though outside estimates “have moved up, but it’s not high.”
That was enough for prediction markets to trim recession odds. On Kalshi, the probability of a U.S. recession this year — defined as two consecutive quarters of negative GDP growth in 2024 or 2025 — dropped from 42% to 38% this week, a small but notable shift.
Fed's revised projections
At the March 19, 2025, Federal Open Market Committee meeting, the Fed announced it would hold interest rates steady at 4.3%. But uncertainty over tariffs and global trade led to some adjustments:
- GDP Growth: The Fed lowered its 2025 GDP growth forecast from 2.1% to 1.7%.
- Inflation: Inflation expectations were raised to 2.7%, primarily due to the impact of tariffs.
Current GDP status
Despite the market drama, the U.S. economy has yet to see two consecutive quarters of negative GDP growth.
Memories of the last U.S. recession could be traced to 2020, triggered by the COVID-19 pandemic. The economy has since seen a strong rebound.
- Third quarter of 2024: Real GDP grew 3.1%.
- Fourth quarter of 2024 (second estimate): 2.3% growth.
Upcoming data release
The Bureau of Economic Analysis (BEA) will release its advance estimate for first-quarter 2025 GDP on April 30. If the economy is actually contracting, that’s when we’ll start seeing signs.
The case for a recession happening this year
Several factors could lead to an uptick in recession probabilities:
- Trade Tensions: Ongoing tariff disputes may dampen business investment and consumer spending, potentially slowing economic growth.
- Inflation Pressures: Elevated inflation could erode purchasing power, leading to reduced consumption
The case against a recession happening this year
Conversely, certain elements might reduce recession concerns:
- Labor Market Resilience: A stable unemployment rate and solid job growth can bolster consumer confidence and spending.
- Monetary Policy Flexibility: The Fed’s decision to pause rate hikes provides room to adjust policies in response to evolving economic conditions.
While prediction markets have slightly lowered the odds of a recession this year, upcoming economic data releases and geopolitical developments will play crucial roles in shaping these forecasts.
Stocks closed higher on Wednesday following the Fed’s decision to hold interest rates steady, with the Dow gaining 0.9%, the S&P 500 rising 1.1% to 5,675, and the Nasdaq climbing 1.4%.
