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Known unknowns: Uncertainty, volatility and the odds of recession

Even as the financial markets have rallied in early 2019, recession concerns have dominated investor discussions. We continue to believe that the US economy will avoid recession this year, consistent with our annual outlook, Vanguard Economic and Market Outlook for 2019: Down but Not Out. However, economic policy uncertainty increased and financial conditions tightened significantly in late 2018 and early 2019, although in February both measures rebounded modestly. At the height of increased volatility and economic policy uncertainty, we had increased our estimated probability of recession to 35%. In this note, we explore the extent to which these twin risks are expected to spill over to the real economy and how this impacts our outlook for the US Federal Reserve actions.

 


 

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