Expectations are growing among economists that in its efforts to bring down inflation, the Federal Reserve (Fed) will raise US interest rates to a level that will lead to a recession, and many fear that the central bank will go too far.
Economists who responded to a recent Wall Street Journal survey estimated the chances of a recession at some point in the next 12 months at 49% On average, As of July, compared to 44% in the survey a month ago, compared to only 18% in January.
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About 46 percent of economists said they expected the Fed to raise interest rates excessively, causing unnecessary economic weakness. Slightly fewer of them, 42%, said they expect the Fed to raise interest rates about the right amount, to balance inflation and growth. About 12.3% said the Fed’s interest rate hikes would not be enough.
“Fiscal and monetary policy has remained too light for too long, and now the Fed is catching on, and it always comes with the possibility of aiming too far,” said James Knightley, chief international economist at ING, who now believes the prospect of a recession in the next 12 months stands. 50%.
Inflation in June reached a new 40-year high of 9.1%. Historically, to bring inflation down from such a high level to 2%, the Fed’s target, requires an increase in unemployment and a recession. The Fed hopes that this time the situation will be different.
“The big question is: Will inflation slow down enough that the Fed does not have to tighten so much that the economy is heading for a recession,” said David Berson, chief economist at Nationwide Insurance. “We are actually already on the verge in this respect. Inflation figures have not really improved enough, although there are signs that it may slow down.”
Respondents to the survey cut their growth forecasts for 2022, and they expect GDP adjusted for inflation to rise by 0.7% in the fourth quarter of this year compared to last year. Months.
“Not repeating the recession of 2008”
However, even economists who expect a recession predict that it will be relatively moderate, based on the average forecast across a range of indicators. “This is a slight recession, not a repeat of the 2008 recession,” said Susan M. Stern, an economist at Economic Analysis Associates.
She said, “This is a unique downward turn in the economy, because in part it was the recovery from the corona plague that caused some of the surplus” in jobs and full-time compared to more normal times, she said.
About 40 percent of economists said they expected a recession to last six months or more. The average recession since 1950 was 10.3 months, according to the National Bureau of Economic Research.
Economists’ forecasts for the employment market suggest that if there is a recession, it will be relatively easy. Overall, economists expect an average monthly increase in the number of salaries paid, reaching 130,000 in the next four quarters. About 30.9% expect the economy to decline in number of jobs in at least one quarter from now to September 2023. However, even this relatively pessimistic group expects an average addition of about 9,500 jobs to the market each month, from July 2022 to September 2023. Economists tend to underestimate size. Of job losses leading up to a recession.
High interest rates are already giving signs
The main cause of economic weakness is the tightening of policies by the Fed. In June, the central bank raised the benchmark interest rate on federal funds by 0.75%, the largest increase since 1994, bringing the interest rate to 1.5% -1.75%. The median figure among economists who responded to the survey stands at 3.25% -3.5% by the end of the year, about the same as the Fed’s June forecasts. It is designed to address inflation, which economists predict will ease slightly to an annual level of 6.8% by December, on average, as measured by the Consumer Price Index.
There are hints that higher interest rates are already starting to leave a mark. In addition to the decline in home sales, the two-year yield on Treasury bonds rose higher than the ten-year yield, a situation economists call a reversal of the yield curve. Such reversals suggest that investors expect higher interest rates in the short term to lead to a decline in economic activity, and in the long run there will be interest rate cuts – and throughout history they happened 12 to 18 months before recessions. However, Berson warns that declines happen only after other short-term interest rates (like interest rates on federal funds) rise above long-term interest rates, and that has not yet happened.
“If we have a tightening by the end of the year, as the Fed is currently predicting will happen, and perhaps more than the market expects, there is a very good chance we will see what I would call a real reversal of the yield curve,” he said. “If that happens, there’s a good chance the economy will fall toward a recession in the second half of the year.”
Indeed, about half of those surveyed predict that the midpoint of interest rates on federal funds will exceed the ten-year bond yield in December 2022.
The survey was conducted before the publication of the June Consumer Price Index, which might have affected the answers to some of the questions. The Wall Street Journal’s survey included 62 companies, academics and financial institutions dealing with forecasts, and was conducted between July 8 and 12. Not all participants answered all the questions.