Fed's Williams says US recession not on the cards, some analysts more cautious

The US economy will continue to ‘power ahead’, driving inflation back to target in the process, a top US rate-setter reiterated on Wednesday.

John Williams, the head of the Federal Reserve bank of San Francisco, told the Financial Times he did not understand the reason behind the gloomy warnings about an imminent economic recession.

“I don’t see any signs in the data of any slackening of domestic demand,” he said in an interview published on Wednesday.

In his opinion, the American economy had in fact shown “resilience” despite headwinds such as the large appreciation in the country’s currency, the greenback.

Recent data on US manufacturing, widely seen as a lead indicator for the rest of the economy, had showed the sector was shrinking, feeding such concerns in some quarters.

Is a recession around the corner?

Likewise, several global equity benchmarks had registered declines from their recent peaks whose magnitude was at one point just a hair’s breadth from coinciding with the kind of falls seen in the run-up to recessions.

US Nobel prize –winning economist Paul Samuelson once famously quipped that stock markets had predicted nine of the last five recessions.

However, the S&P 500 had seen 12 instances of 15% declines since 1965 and on seven of those occasions a recession had followed, Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, wrote in the FT on 1 March.

That meant there was a correlation of roughly 60%, which in the case of the MSCI World Index increased to 63% using data going back to 1970.

Of course, those ratios also showed that stock markets send false signals.

Nonetheless, Ned Davis Research revealed that economists had predicted exactly none of the above, Sharma added.

Coincidentally, on 25 February Citi’s chief economist William Buiter told clients that the "genuine" - taking into account mis-measurements in Chinese data, that is - rate of global economic expansion in 2016 would be "barely above" 2.0%.

That level was widely considered as the threshold between global growth and recession.

Recession not on the horizon

Domestic inflation pressures would strengthen, Williams predicted, telling the FT the unemployment rate was set to fall to 4.5% by year-end and remain there for some time.

“I understand the risks, we do a lot of analysis... but [I am not seeing] how that is going to knock the US economy into a recession.”

Williams is scheduled to deliver a speech at the Bishop ranch forum in San Ramon, California, at 15:00 GMT.