Analysts are increasingly seeing a recession looming in the US after the Federal Reserve’s biggest rate hike since 1994 and signs of weaker consumer spending.
The Fed raised its key rate by 75 basis points on Wednesday to a range of 1.5% to 1.75% as officials intensified their fight against stubbornly high inflation.
Wells Fargo & Co. now forecasts a “mild recession” from mid-2023 as inflation becomes more entrenched in the economy and erodes consumer purchasing power — and as the Fed takes more aggressive steps to address it. Meanwhile, Moody’s Analytics said the chances of a soft landing are smaller.
“The Federal Reserve is going to raise interest rates until policymakers break inflation, but the risk is that they will also destroy the economy,” Ryan Sweet, chief of Moody’s Monetary Policy Analytics Research, said in a research note. “Growth is slowing and the effect of the tightening financial market conditions and the elimination of monetary policy has yet to hit the economy.”
US retail sales fell for the first time in five months in May as higher prices hit consumers’ pockets. Also on Wednesday, the Federal Reserve Bank of Atlanta cut its estimate for second-quarter growth to 0%. And Guggenheim chief investment officer Scott Minerd said the US may already be in recession given the slowdown in consumer spending.
A growing number of economists have recently said that a contraction next year is hard to avoid. In his note dated Wednesday, Wells Fargo’s Jay Bryson said he expected a soft landing just a week or so ago — but now his base case is a mild recession.
At the same time, unemployment remains at an all-time low and while unemployment benefit claims soared to a five-month high last week, the labor market remains tight. That force should support additional spending and prevent the economic contraction from being too deep, Wells Fargo says.
A dip at the start of 2024, barely on the radar just a few months ago, is now close to a three-in-four chance, according to the latest estimates from Bloomberg Economics.
A recession is generally defined as a decline in general economic activity that is broad and lasting for more than a few months. The US has just emerged from its deepest post-World War II slump in 2020, after the Covid-19 pandemic hit.
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