- The US economy is currently resilient but will face a mild recession, Bank of America's Michael Gapen said.
- The bank's chief economist said a labor-market correction is needed for inflation to decline to the Fed's 2% target.
The US economy will likely face a mild recession later this year, but the risk of a severe economic downturn appears low as of now, Bank of America's chief economist Michael Gapen has said.
A correction of labor-market imbalances is needed to bring inflation back down to the Federal Reserve's 2% target, and that typically looks like a mild recession, Gapen told Yahoo Finance on Tuesday.
"I define mild as something less severe than the average recession," he said. BofA's outlook rounds up to a 1% peak to trough decline in GDP – which is less than where the average downturn of a 1.5% decline has historically been, according to him.
"Unless bank stress gets worse and a credit crunch is revealed, it's harder to see where that hard landing risk is coming from at present," he said, adding that from a markets perspective there is not a major difference between a mild recession and a soft landing, a scenario that refers to a moderate economic slowdown.
With risks receding, stress in the banking sector stabilizing, and macroeconomic trends looking good, Gapen said the Fed faces a tough decision regarding interest rates and investors can't completely rule out the possibility of another hike.
"The bank stress situation is in stasis – it's not getting a lot better, but it's not getting materially worse. Underneath that, the employment and other spending data show an economy that's generally resilient," he said.
The US labor market still remains strong, and that's what would encourage the Fed to stick with its tightening campaign – having raised interest rates from near-zero levels to upwards of 5% since early 2022.
The latest payrolls data showed American employers added 339,000 jobs in May, well above what was expected by economists.
"Credit conditions have certainly tightened and the cost of credit has risen so that's a headwind. But I still think there's tailwinds that are showing through and keeping the economy in an expansion phase and leaning the Fed in the direction of thinking it still needs to do more," Gapen added.