Can a recession be avoided? It’s a close call, economist Zandi says.

In my 35 years as a professional economist, I have rarely been as unsure about the economic outlook as I am now.

There was the chaos of the Global Financial Crisis a generation ago, which required a government bailout to avert the collapse of the financial system and economy. There was also the COVID pandemic, when the economy shut down as the world came to grips with the virus. It is hard to fathom how devastating a hit the economy would have taken without the massive support it received from the Federal Reserve and lawmakers.

It is extraordinarily tough to gauge the economic outlook this time due to the unprecedented uncertainty created by the global trade war and economic policy more broadly.

Just how unsure the economy’s prospects are is evident in the big swings in economists’ assessments of the probability of recession in the coming year.

Economists use this probability as a shorthand way of articulating how concerned they are about the economy’s near-term prospects. It is, for the most part, a subjective assessment based on various data and heuristics. When the probability is over 50%, economists are signaling they expect a recession dead ahead.

Since the trade war began in earnest earlier this year, many economists’ recession probabilities have swung around this 50% threshold. Rising above 50% when it appeared there would be higher U.S. tariffs for longer and below 50% when the tariffs appeared less onerous.

Recession probabilities were at their apex, at well over 50%, following the reciprocal tariffs announced in early April. They have since fallen back to just below 50% after the U.S. and China agreed not to set tariffs so high that they shut down trade between the two countries.

My assessment of the recession probabilities has been similar. A few weeks ago, at the height of my angst, I put the probability at 60%. It has since receded to 45%.

Of course, these odds are sure to change with the ups and downs in the trade war.

It doesn’t help that the Federal Reserve is ostensibly as uncertain about the economic outlook as I am.

Fed officials have been notably transparent in their confusion regarding the tariffs. Like everyone else, they don’t know how high the tariffs will be, for how long, and on which countries and products. Immigration and fiscal policy are also in flux.

Until policymakers get some clarity on these policies, which seems to be weeks, if not months, away, they don’t know the appropriate monetary policy response and have thus put any further interest rate cuts on hold.

Further complicating things for the Fed is that the tariffs are expected to result in higher inflation, as much of the tariff increase likely will be passed through to consumers in higher prices. That means weaker economic growth, as consumers adjust to their reduced purchasing power and become more cautious spenders.

More restrictive immigration policies that impact the availability of labor reinforce these dynamics, adding to costs and inflation and weighing on growth.

It is unclear whether the Fed should raise interest rates in response to higher inflation or cut rates in response to a weaker economy. As such, the Fed will likely do nothing, waiting to see whether the inflation or growth effects of higher tariffs and restrictive immigration policy dominate.

The negative growth effects of the tariffs and immigration policies will most likely outweigh the inflation effects, and the Fed will resume slowly cutting rates later in the year. But this isn’t a gimme, as consumers’ inflation expectations have jumped in anticipation of the tariffs. If this translates into bigger wage demands from workers, then inflation may be more persistent as businesses pass along these higher costs, and the Fed will hold policy unchanged for even longer.

And if it appears a dreaded wage-price spiral is taking hold and inflation is becoming more entrenched, the Fed would even raise interest rates. Fed officials would tolerate a recession, appropriately believing that if they didn’t and inflation took root, a much worse recession would follow.

In times past, when the economy faltered, the Federal Reserve almost always quickly came to the rescue, aggressively lowering interest rates. This almost surely won’t be the case this time.

It’s not that the Fed won’t ultimately respond to a seriously weakening economy, but it will take longer to respond than it has historically. Indeed, the Fed may wait so long that the economy suffers a downturn.

I concur with most economists that while it will be close, the Fed will be able to successfully navigate all this, and consumers and businesses will keep on spending, investing, and hiring — a recession will be avoided.

But I will end where I began: I’ve rarely been so unsure about the economic outlook.