Bloomberg News reports that to hear whispers in the corporate and financial markets and America’s C-suites, a recession in the United States is inevitable and imminent. But it is not necessarily so. While the dangers related to the downturn have surged as there is a slowing down of growth, most economists are arguing a contraction is not likely to take place immediately, given the consistent strength of the job market and the $2 trillion cash that is in excess on the household balance sheets.
The inflation might not be imminent and immediate
They’re worried that the Federal Reserve’s interest rate and the all-time high inflation in decades will eat into the excess cash. Even then, an economic drop is not likely to occur. The ex-Fed official and economist Peter Hooper of Deutsche Bank AG was the first to predict a recession and put odds that one might happen next year at 70% plus. But he still says specific scenarios can avoid the same.
In the words of Treasury Secretary Janet Yellen, that is, it will take luck and skill of the Fed as it tries to combat rising costs. The success is also dependent on factors beyond the central bank’s control, a point that Fed Chair Jerome Powell has made clear amidst the supply chain shock due to the ongoing war in Ukraine.
Bloomberg News reports that if the worst effects on the economy due to Covid-19 are over and war is behind, chief economist at Moody’s Analytics Mark Zandi believes that Fed can still pull it up.
In 2023, the economy’s fate will depend on inflation and how high the Fed will raise the rates to acceptable levels. According to Deutsche Bank’s Hooper, the Fed might require to push short-term interest rates as high as 5% to wring inflation out of the economy. This would perhaps be the highest since 2007 and well above the present Fed’s 0.75% to 1% target range.
This does not necessarily mean that the task of the Fed is going to be easier. Another plus for the Fed is that businesses, consumers, and investors are seemingly convinced that, in time, inflation can be brought under control, as indicated by the surveys and indicators of the bond market.
This implies that the policymakers don’t need to wring out “punishing recession” inflationary psychology out of the economy, as stated by the chief US economist at JPMorgan, Michael Feroli. Feroli sees a slowdown in growth to just 1% towards the latter part of 2023 as ripples of tighter monetary policies might impact the economy.
