The US economy is more likely than not to sink into a recession this year as the Federal Reserve tightens monetary policy in its bid to cool decades-high inflation, economists warned Monday.
“Disruptions in the energy and food sectors, coupled with declining consumer sentiment, are contributing to a looming economic slowdown in the US and abroad,” Nomura economists Aichi Amemiya and Robert Dent wrote in a note Monday.
Meanwhile, the Fed’s sharper-than-expected interest rate hikes are likely to hurt growth in the near term.
“With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe a mild starting recession in the fourth quarter of 2022 is now more likely than not,” the note from the investment bank said, according to Bloomberg.
The Nomura economists now expect US economic growth to slow in fiscal 2022, with real gross domestic product (GDP) expanding just 1.8% compared to a previous forecast of 2.5%. The US economy is projected to shrink 1% in fiscal 2023 rather than grow by 1.3% as the bank originally expected.
Still, the recession is projected to be mild because Americans have compiled strong balance sheets and amassed savings, according to the economists. The funds will allow consumers to weather the downturn despite tightened Fed policy that will make credit and other forms of borrowing more expensive.
The Fed hiked interest rates by three-quarters of a percentage point earlier this month, marking the sharpest hike for the central bank since 1994. Similar moves are expected at Fed meetings and July and potentially beyond if prices remain high.
The Fed’s action was announced days after the May Consumer Price Index showed inflation spiked 8.6% — its fastest rate since 1981.
“With monthly inflation through 2022 likely to remain elevated, we believe the Fed response to the downturn will initially be muted,” the Nomura economists added.
Nomura’s note is the latest sign that economists and investors are skeptical of the Fed’s ability to engineer a “soft landing” for the economy by hiking rates without triggering a recession.
Former Treasury Secretary Larry Summers warned earlier this month that a recession was now “more likely than not” within the next two years. And famous Allianz economist Mohamed El-Erian argued in May that “stagflation” – a period of slowing economic growth and sustained high prices – was “unavoidable” even if the economy dodges a recession.
Despite the dire warnings, President Biden and current Treasury Secretary Janet Yellen have insisted that a recession is not an inevitability.
“Well, I expect the economy to slow, it’s been growing at a very rapid rate as the economy – as the labor market has recovered and we have reached full employment, it’s natural now that we expect to transition to steady and stable growth. But I don’t think recession is at all inevitable,” Yellen said on ABC News’ “This Week” on Sunday.
Biden has also expressed optimism about the economic outlook despite mounting criticism from Republicans and others who say his policies have contributed to inflation.
“First of all, it’s not inevitable,” Biden said last week. “Secondly, we’re in a stronger position than any nation in the world to overcome this inflation.”