NEW YORK — With the NFL season upon us, it’s important to remember that sports books clean up by convincing people to place low-probability wagers that only pay out if everything goes right: $5 gets you $90 if the San Francisco 49ers win and George Kittle gets a receiving touchdown and Christian McCaffery runs for 100-plus yards. It’s useful to think about the Federal Reserve’s attempt to execute a “soft landing” in similar terms: Unemployment can’t rise too sharply, growth must persist and inflation must keep falling in order for that bet to cash out. Many — including Treasury Secretary Janet Yellen and Fed economists — are optimistic about that outcome. But even with positivity emanating from President Joe Biden’s allies, the Democratic caucus and Wall Street, plenty of economists still don’t trust that parlay. Soft landing “narratives put up a good fight in the late innings of an economic cycle,” said Carl Riccadonna, the chief U.S. economist at BNP Paribas. At a briefing in a midtown conference room, Riccadonna, BNP Paribas USA Vice Chair Jean-Yves Fillion and other bank officials ticked through what could cause those narratives to fail: The nominal federal funds rate is now higher than U.S. growth, a dynamic that proved to be “a very ominous signal” in earlier economic cycles, Riccadonna said. Corporate profits, which tend to drive private sector investment, started to sag earlier this year. The number of U.S. companies that have filed for bankruptcy has spiked. Researchers at the Federal Reserve Bank of San Francisco estimate that consumers have plowed through more than three-quarters of the $2.1 trillion in savings they’d amassed during the pandemic. There are signs that lower-income consumers are becoming more price sensitive as they eat into those financial cushions and, as the labor market softens, spending among many households will soon be constrained by their paychecks. That would slow the economy. “The back half of the year is going to be very interesting in terms of watching for signals of economic stress,” Riccadonna said. “Then we head toward a mild contraction.” And BNP isn’t the only bank that still has a recession in its forecast. Deutsche Bank also anticipates the economy will tumble into negative territory. “We’ve long anticipated that the consumer would face a number of headwinds and that those headwinds would be concentrated in the latter half of this year,” Matthew Luzzetti, Deutsche’s chief U.S. economist, told your host. That’s increasingly a divergent view as other banks like Goldman Sachs and JPMorgan Chase lower the probability of an economic slump. But the headwinds described are real and could pose an obstacle as both the White House and the Biden campaign move to make the economy’s resilience a selling point to voters who’ve given the president low marks as prices continued to climb despite higher borrowing costs. We’ll get a clearer sense of the Fed’s progress on inflation when the Labor Department releases the consumer price index for August on Wednesday. Those challenges — along with the many economic headwinds facing Europe and China — aren’t necessarily cause for alarm. If there is a recession in the U.S., it’ll likely be mild. “I don’t see this, at least today, as a ‘run for cover’ chaotic environment,” Fillion said. Separately, Luzzetti noted that while he still anticipates a recession, “soft landing prospects have improved.” So can the Fed pull it off? It’s definitely possible. But Kittle didn’t score, so your host is out $5. IT’S MONDAY — The answer to Victoria Guida’s Friday trivia Q: Randal Quarles was the only Fed official who Sen. Rand Paul voted to confirm. But we’ll also give credit to anyone who guessed Judy Shelton. Paul voted to advance her nomination in a procedural vote, though she was blocked before she got to confirmation. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com
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