Associated Press
- The Federal Reserve said last week that it no longer expects a recession in the US.
- But unemployment will spike above 4% over the next year, according to Vanguard's top economist Joe Davis.
- "By that metric, it actually is a recession – because you have very modest job losses," he said.
Americans will start losing their jobs soon – and that will likely stop the Federal Reserve from achieving its dream no-recession scenario, according to Vanguard's top economist Joe Davis.
Most banks expect unemployment to spike above 4% over the next 12 months as the central bank's aggressive interest-rate hikes filter through into the labor market.
Davis told Bloomberg's "What Goes Up" podcast that while those job losses will suppress wage growth and help inflation fall to the Fed's target level of 2%, they'll also scupper its hopes for a so-called "soft landing" – when soaring prices cool but there's no recession in the US.
"It's going to take some labor market weakness to go that last yard, as many call it, from 3% trend inflation down to 2%," the asset manager's chief global economist and head of investment strategy said.
"Almost everyone has a rise in the unemployment rate of at least 30 or 40 basis points, so going above 4% over the next year," Davis added. "Well, historically, that has been 100% associated with a recession – now, not necessarily deep in magnitude, but a recession."
The Vanguard forecaster's warning comes after the Fed itself said it's no longer expecting there'll be a recession in the US this year.
"Semantically, they're on record saying no recession," Davis told Bloomberg. "But by [the unemployment] metric, it actually is a recession – because you have very modest job losses."
The central bank has raised interest rates from near-zero to over 5% since March 2022 in a bid to tame soaring prices but pledged to take a data-dependent approach to tightening last week.
Inflation has since fallen from four-decade highs to just 3%, while job numbers and the US's GDP have both kept ticking up despite borrowing costs rapidly rising.