The chances of the US entering a recession are receding, thanks to the Fed’s slashing of interest rates and injection of capital into the markets, according to San Francisco Fed President Janet Yellen. This from MarketWatch:

Although not so clearly explained by the central bank, Fed officials undertook these unprecedented steps in some measure to ward off what they like to call an “adverse feedback loop.” 

That isn’t a term from a heavy-metal concert. Instead, it is one of the quickest ways an economy can stumble and fall. Sharp declines in asset values puts pressure on banks and financial institutions, which are then forced to sell assets and cut back lending. This puts downward pressure on the economy as a whole, and starts the cycle all over again.

The Great Depression was an example of an adverse feedback loop.

In a breakfast speech on the economic outlook, Yellen said that the recent improvements in financial markets have lowered the odds of such a negative event. “[I] am encouraged by what I’ve seen both from the economy and financial markets to believe we’ve really minimized the odds of that dark scenario,” she commented.

A sharp drop in home prices remains “one of the biggest risks facing the outlook” and “one of the key questions going forward,” according to Yellen.

“The truth,” says Andrew Gordon in Investor’s Daily Edge, “is employment isn’t holding up well. And prices aren’t being held down too well. Mark my words. These employment figures will also be revised upwards.

“What seasonality giveth, it will taketh away… come June. These very important inflation and job numbers will not merely slip. They could very well drop drastically. Wall Street won’t like that. If crude prices remain well above $100 by then (as I think they will), it will be damning evidence that the Fed couldn’t, after all, finesse its way out of the twin threats of no growth and rising inflation.

“This is my contrarian take. While most economists and brokerages have been predicting a 2nd-half comeback for the economy, I believe it’s going to begin a major leg down. Depression/recession, crisis, runaway inflation, a new bear market, and Fed impotence will be Wall Street’s new battle cries. It won’t be pretty.”

James Montier agrees with this bearish outlook, in John Mauldin’s Outside The Box, saying we are in a “sell in May and go away” summer.