According to experts, the US economy will likely enter a mild recession by the end of 2022 as the Federal Reserve raises rates to contain prices.
Experts warn that financial conditions will tighten further, consumer sentiment is souring, energy and food supply distortions have worsened and the global growth outlook has deteriorated.
The Federal Reserve raised interest rates by 75 basis points last week, the largest increase in 28 years, in a bid to rein in inflation, which reached a new high of 8.6% in May. Inflation has remained high throughout 2022, prompting economists and financial analysts to fear that the country is on the verge of entering a recession. The Federal Reserve of the United States has already begun one of the most rapid tightening cycles in decades. It has boosted its key policy rate by 0.75 percentage points from near-zero levels since March.
These professionals are interested in gross domestic product, or GDP, which is the total worth of all goods and services generated in a country during a given time period , a key metric used to gauge economic growth and recessions. In the first three months of 2022, the US GDP dropped by 1.4%, likely due to a spike in COVID-19 cases and rising inflation. The conflict in Ukraine, as well as the stock market’s shakiness, have only added to the country’s economic troubles. When GDP decreases for two consecutive quarters, the country is technically in recession. (Normally, the National Bureau of Economic Research makes the final decision, but it hasn’t done so yet.)
“With rapidly slowing growth momentum and a Fed committed to restoring price stability, we believe a mild recession starting in the fourth quarter of 2022 is now more likely than Aichi Amemiya and Robert Dent, economists at Nomura, stated in a note on Monday that this is not the case.
They claimed that excess savings and consumer balance sheets would assist slow the pace of economic decline, but that monetary and fiscal policies would be limited by high inflation, which has lowered its real GDP forecast for this year to 1.8%, compared to 2.5% earlier, while the projection for next year is seen declining 1%, from 1.3% growth earlier.
The report comes as Treasury Secretary Janet Yellen stated on Sunday that “unacceptably high” prices will likely persist through 2022, and that the US economy will stagnate. Separately, Federal Reserve Bank of Cleveland President Loretta Mester said Sunday that the risk of a recession in the US economy is increasing and that it will take several years to return to the central bank’s 2% inflation goal.
“With monthly inflation anticipated to stay elevated through 2022,” the Nomura analysts wrote in their note, “we believe the Fed response to the downturn will initially be mild.” They predict rate hikes to continue into 2023, albeit at a little lower terminal rate of 3.50-3.75 percent in February than the previous forecast of 3.75-4.00 percent in March.