WSJ survey shows recession odds drop to 33% as inflation stays sticky

The probability of a US recession has fallen to its lowest level in more than a year, but persistent inflation expectations are keeping the Federal Reserve from easing policy anytime soon.

Economists see the probability of a US recession at 33 percent, down from 45 percent in April, though inflation expectations remain stubbornly above the Federal Reserve's 2 percent target, the Wall Street Journal's quarterly Economic Forecasting Survey showed.

The survey, conducted July 3 to 8 among more than 70 academic, business and financial economists, projects the consumer-price index will stand at 3.04 percent in December 2025 and 2.58 percent in December 2026 — both above the Fed's target. The probability of a quarter-point rate cut by the Fed's September 2026 meeting has fallen to 3.4 percent, down from 5 percent just 24 hours before the survey's release, reflecting market pricing that aligns with the survey's findings.

"The persistence of above-target inflation expectations is the single biggest constraint on the Fed's ability to ease," said James Okafor, macro analyst at Edgen. "Every month that core CPI prints above 3 percent pushes the first rate cut further into 2026."

The lower recession odds reflect robust labor data and tempered trade policy concerns, even as the economy navigates the impact of ongoing geopolitical disruptions. Nonfarm payrolls have averaged more than 200,000 per month over the past three months, well above the roughly 100,000 breakeven rate estimated by the Atlanta Fed. The yield on the 10-year Treasury note has held near 4.3 percent, while the S&P 500 has gained about 6 percent since the April survey, suggesting markets have priced out much of the recession risk that dominated the first quarter.

Historical Context

The current 33 percent recession probability marks a sharp reversal from the 45 percent reading in April and the elevated levels seen throughout 2022 and 2023, when the survey consistently showed recession odds above 50 percent. The last time the survey recorded a probability below 35 percent was in October 2024, when the economy was adding jobs at a robust pace and GDP growth was running above 2 percent. The improvement reflects a gradual normalization of supply chains and a stabilization in consumer confidence after the initial shock of tariff escalations earlier this year.

Policy Implications

The inflation projections carry particular weight because they represent the consensus of the WSJ's panel, which has tracked economic trends for more than 40 years. If the CPI remains above 3 percent through the end of 2025, it would mark the fourth consecutive year of above-target inflation — a persistence that would likely keep the Fed on hold through the first half of 2026. Markets currently price a 96.6 percent probability that the Fed will hold rates steady at the September 2026 meeting, according to fed funds futures data.

The survey's findings suggest the economy has absorbed the initial shock of geopolitical disruptions better than economists anticipated three months ago. The July survey, titled "War Leaves Economy With More Stubborn Inflation, Economists Project," indicates that while growth risks have receded, the inflation challenge has become more entrenched. The Fed's preferred inflation gauge, the core PCE price index, has hovered near 2.8 percent for the past six months, showing little progress toward the central bank's goal.

For investors, the implication is clear: the "higher for longer" interest rate environment is likely to persist well into 2026, compressing equity valuations in rate-sensitive sectors such as real estate and utilities while benefiting financials and energy companies that perform well in a stable-rate environment. The US dollar index has held near 104, supported by the widening rate differential between the Fed and other major central banks that are cutting rates more aggressively.

The next FOMC meeting is scheduled for September 16-17, with the Summary of Economic Projections offering the next major update on where Fed officials see rates heading. If the September survey from the WSJ shows a further decline in recession odds without a corresponding drop in inflation expectations, the case for a 2026 rate cut will weaken further.

This article is for informational purposes only and does not constitute investment advice.