- The United States will fall into a mild but long recession as the Fed raises interest rates sharply, Nomura said.
- Investment bank economists said the U.S. economy will grow 1.8% this year before shrinking 1% in 2023.
- He said the slowdown would be prolonged because high inflation means the Fed and government are unlikely to issue more stimulus.
Federal Reserve Interest Rate Hikes Will Put the U.S. Into a Soft But Long Crisis
this year, it will cause the economy to contract in 2023, investment bank Nomura said on Monday.
Nomura said US gross domestic product would begin to contract in the fourth quarter of this year, followed by six more quarters of negative growth.
She said US GDP would only grow 1.8% in 2022 before shrinking 1% in 2023. The bank expects unemployment to top 5% by the end of 2023 and reach nearly 6% in 2024, compared to 3.6% currently.
The Fed raised interest rates by 75 basis points, or 0.75 percentage points, last week, the biggest increase since 1994. Less than a week earlier, data showed inflation was at 8.6% year-on-year in May, the highest reading in 41 years.
Nomura economists Aichi Amemiya and Robert Dent said in a note on Monday that persistent inflation meant the Fed would have to raise interest rates more than expected, which would create problems for growth.
Bank analysts said the Fed would raise rates to around 3.4% by year-end and push them to a high of between 3.5% and 3.75% in 2023, before reduce them as growth slows. The Fed’s target range is currently between 1.5% and 1.75%.
“With growth momentum rapidly moderating and a Fed determined to restore price stability, we believe a mild recession beginning in the fourth quarter of 2022 is now more likely than not,” the analysts said.
Nomura said the recession would only be moderate as consumers had accumulated a large amount of savings during the coronavirus pandemic, which should provide a cushion.
However, analysts at the bank expect the slowdown to last longer than previous bouts of weakness, as high inflation means more central bank or government stimulus is unlikely.
Amemiya and Dent said the economy was already slowing as retail sales fell in May. They said Google searches for “recession” had recently increased dramatically.
Economists added that the Fed’s interest rate hikes – through their effect on bond yields and mortgage costs – have already hit the housing market, a key part of the US economy.
Recessions in the United States are judged by the National Bureau of Economic Research. He defines them as a period when activity declines significantly across the economy and lasts for more than a few months.