The U.S. economy is ending 2022 on uncertain footing. The Federal Reserve is aggressively fighting inflation with interest rate hikes that seek to cool consumer demand, but prices remain stubbornly high and in conquering one problem, the U.S. central bank risks triggering another: A recession.
Persistent and elevated inflation has pushed the Fed to raise interest rates at the fastest pace since the 1980s, a decision that risks imperiling the economy in 2023.
The probability of a downturn in 2023 climbed to 70% in December, according to a Bloomberg monthly survey of economists, up from 65% in November. The poll, conducted between Dec. 12-16, surveyed 38 economists.
“The U.S. economy will likely fall into a recession over the next year if it is not already in one,” said Bill Adams, chief economist for Comerica Bank. “The silver lining is that the mismatches between supply and demand that have fueled historically high inflation should be much less of a problem by a year from now.”
INFLATION EASES MORE THAN EXPECTED IN NOVEMBER TO 7.1%, BUT CONSUMER PRICES REMAIN ELEVATED
The Federal Reserve has already approved seven straight interest rate hikes this year, including four 75-basis-point hikes, putting the federal funds rate well into restrictive territory. At their latest meeting, policymakers signaled they plan to raise rates higher in 2023 and hold them at elevated levels until 2024.
Officials also indicated that economic growth will slow sharply next year and that unemployment will march substantially higher to a rate of 4.6% as rate hikes bring the U.S. to the brink of a recession. The Fed expects the jobless rate to remain elevated in 2024 and 2025 as steeper rates continue to take their toll by pushing up borrowing costs.
In plain English, that amounts to job losses of roughly 1.7 million.
Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.
NOVEMBER INFLATION BREAKDOWN: WHERE ARE PRICES RISING THE FASTEST?
“The Federal Reserve set the predicate for an eventual pause in its efforts to restore price stability in early 2023 even as it indicated it intends to continue lifting rates into an economic slowdown that looks awfully close to the Fed forecasting a recession next year,” said Joe Brusuelas, chief economist at RSM. He noted the economic forecasts “come as close to the Fed forecasting a recession as one is ever likely to see.”
Although Fed Chair Jerome Powell has acknowledged the difficulty of avoiding a recession, he has also pushed back against the certainty of a downturn, suggesting that lower inflation prints in October and November could boost the odds of a soft landing – the sweet spot between curbing inflation without flatlining growth.
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“To the extent we need to keep rates higher and keep them there for longer and inflation moves up higher and higher, I think that narrows the runway,” Powell told reporters. “But lower inflation readings, if they persist, in time could certainly make it more possible. I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not. It’s not knowable.”