No Relief From Rate Rises Yet as the U.S. Enters a Mild Recession

US recession
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According to analysts surveyed by Reuters, who unanimously predicted the United States economy would enter a recession in the next year, the upcoming year will see the United States economy enter a brief and mild contraction. On December 14, the Federal Reserve is expected to implement an interest rate increase of just 50 basis points.

Inflation is still running well above the 2% target that the Fed has set for itself, so the Fed is likely to raise interest rates by at least a half point early in the new year. Even though economists continue to say that there is a 60% chance of a recession in 2023, this is still the case.

After increasing the federal funds rate by 75 basis points at each of the previous four meetings, the 84 economists who were polled from December 2–8 expected the central bank to go for a slightly softer half of a percentage point to 4.25%–4.50% this time. This was in contrast to their expectations that the central bank would raise the rate by 75 basis points at each of the previous four meetings.

The probability of a recession occurring within the next two years has increased to 70%, up from 63% in the previous forecast. Even though the central bank is only trying to cause some pain and not a full-blown recession, this is still the case.Economists, as a group, have a tendency to be slow in forecasting recessions.

This would mean that investors and the stock market may have been too optimistic about the biggest economy in the world staying out of a recession over the last month.This is already being reflected in the flight to the United States dollar as a safe haven investment.

Sal Guatieri, a senior economist at BMO Capital Markets, says, “Unless inflation falls soon, the U.S. economy still seems to be headed for some difficulties, though maybe a little later than expected.” The good news is that the downturn should be less severe because more people are saving.

“However, this only works if the Fed doesn’t slow the economy down even more because of how strong it is. If it does, a delayed downturn may just be a sign of a worse one.”

Despite the fact that interest rate futures indicate that the federal funds rate would reach its highest point between 4.75 and 5.00 percent early in the new year, one-third of the experts, or 24 out of 72, predicted that it would be even higher.

There are already clear signs that the economy is starting to slow down, especially in the U.S. housing market, which is often the first to react to tighter financial conditions and was at the centre of the recession in 2007-2008.

The number of sales of already-existing homes has dropped for the last nine consecutive months. In a different survey, Reuters found that real estate prices are expected to drop by about 6% over the next year and by nearly 12% from their peak to their lowest point.

27 out of the 45 experts who made quarterly projections for the gross domestic product (GDP) expected a decline in GDP for two consecutive quarters or more at some point in 2023. This is almost 60% of the total estimates.

35 out of 48 economists surveyed said that if there was a recession, it would be mild and relatively brief. Eight people said there would be a long, weak recession, while only four said there wouldn’t be one at all.Someone another remarked “short and profound.”

It was thought that the largest economy in the world would only grow by 0.3% the next year, and that it would continue to grow at rates much lower than its long-term average of about 2% until 2024.

Over 75% of economists, or 29 out of the 38 who answered a second question, said that the risk associated with their GDP estimates was more likely to be bad than good.

But since inflation is expected to be higher than the Fed’s goal until at least 2026 and the job market is expected to stay strong, the bigger risk was that interest rates would peak higher and later than expected.

Jan Groen, chief U.S. macro strategist at TD Securities, thought the fed funds rate would reach its highest point between 5.25% and 5.50% in May. However, “core inflation is likely to stay stubbornly high, so we now expect the current tightening process to last until Q2 2023,” he said.

“Given the high and steady rates of core inflation and the fact that the job market is still strong,” he said, “there is still a chance that the final rate will be even higher given these conditions.”

It was anticipated that the unemployment rate in the United States, which has remained at a low level so far, would grow from its present level of 3.7% to 4.9% by the beginning of 2024. Even if that were to come to pass, it would be a significant drop from the levels that were witnessed in earlier recessions.

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