The Fed says a mild recession is in the cards this year. What could that look like?

The U.S. economy is almost certainly careening toward a recession that will have a years-long impact, according to the Federal Reserve’s own staff.  

Minutes from the Fed’s March meeting released last week indicate that its forecasters believe a minor downturn is imminent after recent turmoil within the banking system – even as the central bank’s top policymakers deny such an outcome. 

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years,” the minutes said. 

However, even a “mild” recession could have severe implications for the economy and the stock market. 

PAIN OF HIGH INFLATION LIKELY TO LINGER FOR MANY AMERICANS

Federal Reserve Chair Jerome Powell arrives for testimony before the Senate Banking Committee March 7, 2023 in Washington, D.C. ((Photo by Win McNamee/Getty Images) / Getty Images)

JPMorgan strategists said in an analyst note this week that even a modest downturn could cause stocks to crater by about 15%. 

“Even a mild recession would warrant retesting the previous lows and result in 15%+ downside,” they said in the note.

The gloomy forecast comes after a brutal year for the stock market, its worst since the 2008 financial crisis. All three indexes tumbled in 2022, snapping a three-year win streak. The Dow Jones Industrial Average ended the year down 8.8%, the best of the three. The S&P 500 sank 19.4% while the tech-heavy Nasdaq Composite plunged 33.1%.

Stocks rallied in the first quarter of 2023, and equities seem poised to continue that momentum despite sticky inflation and the threat of additional rate hikes. As of Tuesday afternoon, the S&P is up nearly 9% from the start of the year. However, the JPMorgan analysts called the rally “irrational,” noting it was “mainly driven by systematic inflows and short covering.” 

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“But these drivers are likely running out of steam,” they said. “We continue to believe a recession is likely this year, as ongoing pressures from high rates/quantitative tightening, credit contraction (following the banking crisis), pressure on carry trades, and geopolitical headwinds permeate through the economy.” 

A mild recession could also cause the unemployment rate to spike. 

Pedestrians near the U.S. Treasury building in Washington, D.C., Friday, Dec. 30, 2022. (Photographer: Ting Shen/Bloomberg via Getty Images / Getty Images)

The labor market has remained historically tight over the past year, but there are growing signs of a slowdown. The economy added just 236,000 jobs in March, the lowest monthly gain since December 2020. 

A separate report released earlier this month showed there were about 9.9 million job openings in February, the first time since May 2021 that the number of available jobs dipped below 10 million.

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There has also been a wave of notable layoffs over the past few months, and the list grows longer by the day. Amazon, Apple, Meta Platforms, Lyft, Facebook, Google, IBM and Twitter are among the companies letting workers go.

Fed officials have made it clear that they expect unemployment to climb as a result of higher rates, which could force consumers and businesses to pull back on spending. Job losses are “very likely,” Fed Chairman Jerome Powell told lawmakers earlier in March. 

Attendees at a healthcare career fair at Cape Fear Community College in Wilmington, North Carolina, Wednesday, Feb. 28, 2023. (Photographer: Allison Joyce/ Bloomberg / Getty Images)

Projections from the central bank’s March meeting show that officials expect unemployment to rise to 4.6% by the end of next year, up from the current rate of 3.5%. That could mean nearly 2 million Americans lose their jobs between now and the end of the year.

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Policymakers have already approved nine consecutive rate increases and have opened the door to a 10th increase at their next meeting in early May, although they have stressed the importance of upcoming economic data releases.