There's been a lot of recession talk this month, and it's taken a toll on sentiment, contributing to a fierce stock market selloff.
The recession concerns stem from a slate of lackluster economic data on inflation and jobs, plus uncertainty about what happens next, now that the White House is putting tariffs in place.
The recent trend toward resurgent inflation and what seems like a shaky jobs market has caused consumer confidence to slip, putting renewed pressure on the Federal Reserve to cut interest rates to prop up the economy.
The situation isn't lost on Fed Chairman Jerome Powell, who for years has been fighting to shore up employment and keep a lid on inflation. The spike in recession chatter caught his attention, prompting him to offer up his thoughts.
Given the Fed's role in setting interest rates, which can cause an economy to pop or drop, it's wise to pay attention to what Powell says.
Federal Reserve Board Chairman Jerome Powell is fighting inflation while also trying to support the U.S. job market amid growing recession fears.Chip Somodevilla/Getty Images
The U.S. economy grows wobbly, hitting stocks
It's not just economists who have grown concerned. The stock market has tumbled in the face of worries that business and consumer spending could slow even as tariffs increase costs on imported products, creating stagflation.
The possibility that the U.S. economy could enter a period of low to no growth and higher inflation is bad news for corporate profits. Since stocks tend to follow earnings over time, hiccups in profit growth cause investors to rein in how much they're willing to pay for stocks, causing a reset.
So far, the S&P 500 is down about 2% in 2025. However, the index's performance has been much worse lately. Since Feb. 20 the benchmark has been down about 7%, including a 3.1% slide last week the worst weekly showing since September.
Investors aren't wrong to wonder whether the economy is in trouble. They're facing a number of headwinds, including:
Sticky inflation
An uncertain jobs market
Slowing economic activity
Arguably high stock market valuations.
In 2022, the Federal Reserve, under Powell's leadership, embraced the most hawkish monetary policy since Paul Volcker broke inflation's back in the 1980s. In total, Powell and company increased the Federal Funds Rate by over 5 percentage points.
The strategy worked, given that inflation fell from more than 8% at its peak to below 2.5% last fall. But the impact of higher interest rates on business and personal spending weakened the jobs market, prompting the Fed to switch gears and cut rates in September, November and December 2024.
So far, those rate cuts haven't helped the unemployment picture, and lower rates have led to Consumer Price Index inflation rebounding to 3% in January from 2.4% in September.
December's Job Openings and Labor Turnover Survey, known as the Jolts report, showed 7.6 million unfilled jobs in the U.S., a whopping 1.3 million fewer than in the year-earlier month.
Meanwhile, the Bureau of Labor Statistics reports that just 151,000 new jobs were created in February, shy of Wall Street's 163,000 estimates. The unemployment rate increased to 4.1% from a low of 3.5% as recently as 2023.
The decline reflects a steady drumbeat of layoffs in the past year, including within high-paying technology and, more recently, federal government workers.
Challenger, Gray, & Christmas's latest research shows that 407,000 technology workers have been laid off since 2022. In February, 172,000 Americans lost their jobs, the most in the month since 2009.
The combination of reexerting inflation and weaker job growth isn't a recipe for gross domestic product growth. The Atlanta Fed's running forecast for quarterly GDP is currently negative 2.4%.
Of course, more data will likely increase that forecast over the coming weeks. Still, first-quarter GDP will likely be below the 3% growth last summer and fall.
That's not great news for the S&P 500, given it came into the month trading at about 22 times forward earnings, much higher than the 10-year average price-to-earnings multiple, which is nearer 18.
Jerome Powell's words on the U.S. economy
The situation puts the Federal Reserve in a tight spot. The Fed's mandate is to ensure low inflation and unemployment, two often contradictory goals.
The Fed can increase interest rates to slow inflation, but higher loan rates slow GDP growth, putting jobs at risk. Alternatively, it can cut rates to bolster activity, but that can cause inflation to spike.
Powell paused the Fed's rate-cut plans after December's reduction, but recession worry could force him to start cutting again, risking more inflation, even as tariffs kick in, which will likely cause inflation to climb, too.
Perhaps unsurprisingly, the Fed chairman has struck a positive tone to try to prop up confidence and provide some wiggle room.
In a speech he bluntly said, the "U.S. economy continues to be in a good place."
While many are wringing their hands over potential near-term problems, Powell is focused on the bigger picture.
"The economy has been growing at a solid pace. GDP expanded at a 2.3% annual rate in the fourth quarter of last year, extending a period of consistent growth that has been supported by resilient consumer spending," said Powell.
He similarly painted a prettier employment picture.
"Many indicators show that the labor market is solid and broadly in balance," said Powell, "Smoothing over the month-to-month volatility, since September employers have added a solid 191,000 jobs a month on average. ... Wages are growing faster than inflation, and at a more sustainable pace than earlier in the pandemic recovery."
Powell also said he didn't view the current employment picture as inflationary. In fact, he doesn't see inflation's recent lift as overly concerning, either.
"Inflation can be volatile month-to-month, and we do not overreact to one or two readings that are higher or lower than anticipated," said Powell.
"Beyond the next year or so, however, most measures of longer-term expectations remain stable and consistent with our 2% inflation goal."
