Economists say the US is going to experience “zero” growth in 2023 and is on the verge of a recession, as a result of the Federal Reserve raising interest rates to reduce high inflation.
Top economists at the American Bankers Association say the resulting recession is likely to lead to a sharp increase in layoffs and push the unemployment rate closer to 5% within the next two years. The rapid growth in wages over the past year is also expected to moderate.
A slowing economy and a weak labor market, however, are seen as helping the Fed bring down inflation more quickly.
ABA projects inflation based on the Consumer Price Index to slow to an average rate of 2.8% in 2023 and 2.2% in 2024 from 6.4% in the prior year.
That would push the inflation rate slightly closer to the Fed’s 2% target than the central bank forecast.
“The wheels are in motion for a reduction in inflation,” said Simona Mokuta, ABA economic advisory panel chair and chief economist at State Street Global Advisors.
Under that scenario, the Fed would actually start cutting interest rates before the end of 2023, as predicted by ABA economists, and would facilitate a modest recovery by 2024.
Senior Fed officials have warned that it is too early to say that the tide has turned in the fight against inflation. They plan to raise the key short-term US interest rate a few more times this year, pushing it above 5% and leaving it higher for an extended period before the economy re-evaluates.
Inflation hit a 40-year high of 9.1% last summer, but has since slowed to 6.5%. However, this is still more than triple the pre-pandemic increase in prices each year.
Yet not all ABA economists were as optimistic that the economy could survive a recession and avoid high unemployment.
“Others are more concerned about the ability to engineer such a Goldilocks result and probably need more pain in the labor market to make that result possible on inflation,” Mokuta said.
Credit: www.marketwatch.com /