The US economy is more likely than not sink into stagnation Economists warned on Monday of this year as the Federal Reserve tightens monetary policy in an effort to cool decades-high inflation.
“Disruptions in the energy and food sectors, along with declining consumer confidence, are contributing to a looming economic slowdown in the United States and beyond,” Nomura economists Aichi Amiya and Robert Dent wrote in a note on Monday.
Meanwhile, sharper-than-expected Fed rate hikes are likely to hurt growth in the near term.
“With growth momentum slowing rapidly and the Fed’s commitment to restore price stability, we believe a mild recession beginning in the fourth quarter of 2022 is now more likely than not,” a note from the investment bank said. Bloomberg.
Nomura economists now expect US economic growth to slow in fiscal 2022, with real GDP growth of just 1.8% compared to a previous forecast of 2.5%. The US economy is expected to contract by 1% in fiscal year 2023 instead of growing by 1.3% as the bank originally expected.
However, the recession is expected to be mild as Americans have amassed strong budgets and amassed savings, according to economists. The money will allow consumers to weather the economic downturn despite the Fed’s tightening policy that will make credit and other forms of borrowing more expensive.
The Federal Reserve raised interest rates by three-quarters of a percentage point earlier this month, marking the central bank’s largest rise since 1994. Similar steps are expected at the Fed’s meetings, July, and possibly beyond if rates remain elevated.
The Fed’s action was announced days after the May Consumer Price Index reported that inflation had risen 8.6% – its fastest rate since 1981.
“With monthly inflation likely to continue rising into 2022, we believe the Fed’s response to deflation will initially be muted,” Nomura economists added.
Nomura’s note is the latest sign that economists and investors are skeptical about the Fed’s ability to engineer a “soft landing” for the economy by raising interest rates without causing a recession.
Former Treasury Secretary Larry Summers warned earlier this month of a recession now “more likely” within the next two years. Renowned Allianz economist Mohamed El-Erian argued in May that “stagflation” — a period of slow economic growth and persistent price hikes — is “inevitable.” Even if the economy escapes recession.
Despite dire warnings, President Biden and current Treasury Secretary Janet Yellen have insisted that a recession is not inevitable.
“Well, I expect the economy to slow down, it’s growing at a very fast rate like the economy – with the labor market recovering and we’ve reached full employment, now it’s normal to expect a transition to steady, stable growth. But I don’t think a recession is ever inevitable,” Yellen said on “This Week” on ABC News on Sunday.
Biden also expressed optimism about the economic outlook despite growing 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 are in a stronger position than any country in the world to beat this inflation.”
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