Fannie Mae economists predict the US will enter a “mild recession” next year as inflation hits a 41-year high of 8.5 percent, and several banks are also expecting the economy to slump.
The company says part of the reason is the Federal Reserve’s efforts to raise interest rates, which could discourage people from taking out home and business loans.
The Fed plans to raise interest rates to 2 percent by the end of the year. This comes after the central bank cut them to near zero to encourage spending during the worst days of the COVID-19 pandemic.
“We continue to see multiple drivers of economic growth into 2022, but the need to rein in inflation, combined with other economic indicators, such as the recent inversion of the government bond yield curve, prompted us to significantly lower our expectations for economic growth in 2023,” Fannie Mae chief economist Doug Duncan said in a statement.
The yield curve inverts when long-term US Treasury rates fall below short-term rates, usually because people expect the economy to deteriorate going forward.
Goldman Sachs, Bank of America and Deutsche Bank have all predicted a recession marked by lower gross domestic product, falling sales and rising unemployment.
Fannie Mae, which sells mortgage-backed securities, is forecasting a “mild” recession in 2023, partly due to the Federal Reserve’s aggressive efforts to curb rising inflation
Inflation hit a 41-year high at 8.5 percent last month. The Biden administration blames “Putin’s price hike” as the war in Ukraine rages on
Grocery, airline ticket and petrol prices have soared, prompting the country’s central bank to hint at another rate hike in May to try to tame the rise
Inflation hit a 41-year high last month.
The latest data showed prices of basic necessities rose sharply, with groceries up 10 percent year-on-year, rents up 4.4 percent, clothing up 6.8 percent and energy costs up 32 percent.
The skyrocketing prices, coupled with policymakers’ current efforts to contain them, could result in a period of low economic activity next year, Fannie Mae warns.
Inflation rose after the Federal Reserve cut interest rates to near zero in 2020.
The Fed wanted to encourage people to borrow and spend during the worst days of the COVID-19 pandemic, when people lost their jobs and businesses had to close for weeks, sometimes months.
The central bank has now pushed interest rates higher to curb rising prices. They have also signaled support for an even bigger hike at their next meeting in May. That could discourage people from borrowing and spending.
Fannie Mae is a government-sponsored company that packages mortgages originated by banks and sells them as mortgage-backed securities to invest in, giving banks more cash flow and making borrowing cheaper.
The company believes the coming recession will not be as bad as that of 2008, when nearly nine million Americans lost their jobs and unemployment reportedly peaked at 10 percent marketplace.
Fannie Mae’s chief economist says: “The need to contain inflation, combined with other economic indicators, such as the recent inversion of the government bond yield curve, has prompted us to significantly downgrade our expectations for economic growth in 2023.”
Federal Reserve Jerome Powell forecast inflation to fall by more than 3 percent after the Fed voted to raise interest rates with plans to raise them to 2 percent by the end of 2022
For one, Fannie Mae says mortgage credit quality is “far better” and mortgage lenders are better prepared to weather the storm Fox business.
But home sales, prices and the total amount of approved mortgages are expected to decline over the next two years “at a pace more consistent with income growth and interest rates.”
Fed Chair Jerome Powell doesn’t believe a recession is inevitable.
“The likelihood of a recession next year isn’t particularly high,” Powell said during the Fed’s March meeting.
“All indications are that this is a strong economy that can thrive in the face of less accommodative monetary policy.”
Goldman Sachs has warned that the Fed’s efforts to tame rising inflation mean there is a 35 percent chance of a recession in the next two years.
“At face value, these historical patterns suggest the Fed faces a tough road to a soft landing as it aims to close the gap between jobs and workers,” said the investment bank’s chief economist Jan Hatzius Bloomberg.
Earlier this month, Bank of America’s chief investment strategist Michael Hartnett wrote in a note to clients: “Inflation shock worsening, ‘rate shock’ just beginning, ‘recession shock’ coming”.
He added that in this context, cash, volatility, commodities and cryptocurrencies could outperform bonds and stocks, a typical precursor to an economic recession.
And Deutsche Bank said: “The US economy is expected to take a major hit from the additional tightening by the Fed by the end of next year and early 2024.
‘We see two negative growth quarters and a more than 1.5 percentage point increase in the US unemployment rate, developments that clearly qualify as a recession, albeit moderate ones.’
Deutsche Bank forecasts a US recession in late 2023 and a 1.5 percent rise in the unemployment rate, taking the total jobless figure to 5.1 percent (above)
President Joe Biden’s administration tried to forestall the bleak news of inflation by blaming Russian leader Vladimir Putin for invading Ukraine
The Federal Reserve has signaled it is expected to begin shedding assets from its $9 trillion balance sheet at its early May meeting, at almost twice the rate of its previous “quantitative tightening” as it begins with a Inflation rate is facing four-decade high at nearly 8 percent.
Meanwhile, the cost of goods and services continues to rise.
Amazon recently announced a 5 percent “surcharge” for online sellers who use their shipping service to account for rising fuel costs, an increase that’s guaranteed to cost consumers more.
The U.S. Department of Agriculture, in its 2022 Food Price Outlook, forecast that takeout and dine-in meal prices will rise by up to 6.5 percent by the end of the year.
Before the pandemic, cheap labor, high productivity and technological advances kept inflation at the 2 percent target.
But supply chain snarls and labor shortages threaten to undo that.
Inflation also threatens to upend President Joe Biden’s agenda as workers struggle to make ends meet amid soaring gas and food prices.