The Fed still has at least half a point to hike rates at the start of the new year, with inflation still well above the Fed’s 2% target, even as economists estimate 60% at the start of the new year . 2023.
After raising the federal funds rate by 75 basis points each of the previous four meetings, 84 economists surveyed Dec. 2-8 expected the central bank to opt for a slightly higher half point this time around. .
While the central bank is just trying to inflict some pain and not a real recession, economists, who tend to be slow as a group at predicting recessions, have raised the probability of a recession within two years to 70% from 63% previously.
This suggests that investors and stock markets may have been racing optimistically over the past month that the world’s largest economy could avoid a recession altogether. This is already evident in safe-haven flows into the US dollar.
“Unless inflation subsides quickly, the US economy still looks headed for trouble, but perhaps a little later than expected. The relative good news is that the slowdown should be tempered by more savings,” he said Sal Guatieri, senior economist at BMO Capital Markets.
“But that assumes the sustainability of the economy doesn’t force the Fed to brake even harder, in which case a delayed slowdown may only signal a deeper slowdown.”
Even though the federal funds rate is expected to peak at 4.75%-5.00% early next year, in line with interest rate futures, one-third of economists, or 24 out of 72, expect that be taller.
There are already clear signs of an economic slowdown, particularly in the US housing market, often the first to react to the tightening of financial conditions, and the epicenter of the 2007-2008 recession.
Existing home sales have declined for nine consecutive months. And home prices, already falling, are expected to fall 12% from peak to peak and nearly 6% next year, according to another Reuters poll.
About 60% of economists, 27 out of 45, who provided quarterly gross domestic product (GDP) forecasts expected contraction for two or more consecutive quarters at some point in 2023.
The vast majority of economists, 35 out of 48, said any recession would be short and shallow. Eight said it would be long and shallow, while four said there would be no recession. One said it would be short and deep.
The world’s largest economy is expected to grow by just 0.3% next year and grow at annual rates well below its long-term average of around 2% through 2024.
More than 75% of economists, 29 out of 38, who answered a separate question, said the risk to their GDP forecasts was to the downside.
But with inflation expected to stay above the Fed’s target through at least 2026 and the job market remaining strong, the bigger risk was that rates would peak higher and later than expected.
“With core inflation likely to remain stubbornly high, we now expect the current tightening process to continue throughout the second quarter of 2023,” said Jan Groen, chief US macro strategist at TD Securities, who expects this to happen. . at 5.25-5.50% in May.
“The risk remains of an even higher terminal rate given high and sticky core inflation rates and still strong labor market conditions,” he added.
The US unemployment rate, which has remained low so far, is expected to fall from the current 3.7% to 4.9% in early 2024. If realized, it would remain well below the levels seen in previous recessions.
(For more Reuters World Economic Survey articles:)
