The US will fall into a long recession this year as the Fed hikes rates: Nomura

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  • The US will fall into a mild but protracted recession as the Fed hikes interest rates sharply, Nomura said.
  • The investment bank’s economists said the US economy would grow 1.8% this year before contracting 1% in 2023.
  • It said the slowdown would be prolonged because high inflation means the Fed and government are unlikely to provide further stimulus.

The Federal Reserve’s rate hikes will propel the US into a mild but protracted phase


recession

This year, the economy will contract in 2023, investment bank Nomura said on Monday.

Nomura said US gross domestic product will contract in the fourth quarter of this year, followed by six more quarters of negative growth.

US GDP will grow just 1.8% in 2022 before contracting 1% in 2023. The bank expects unemployment to rise above 5% by the end of 2023 and from 3.6% currently to almost 6% in 2024.

the fed increased interest rates up 75 basis points, or 0.75 percentage point, last week, the biggest rise since 1994. Less than a week earlier, data showed inflation hit at 8.6% YoY in May the highest reading for 41 years.

Nomura economists Aichi Amemiya and Robert Dent said in a note Monday that persistent inflation meant the Fed would have to hike rates harder than previously expected, posing problems for growth.

Analysts at the bank said the Fed will hike rates to around 3.4% by the end of the year and take them to a peak of 3.5% to 3.75% in 2023 before cutting them as growth slows. The Fed target area is currently between 1.5% and 1.75%.

“With growth momentum slowing rapidly and a Fed committed to restoring 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 will be mild as consumers have built up large savings to provide a cushion during the coronavirus pandemic.

However, analysts at the bank expect the downturn to last longer than previous bouts of weakness, as high inflation means further central bank or government stimulus is unlikely.

Amemiya and Dent said the economy had already slowed and retail sales fell in May. They said Google searches for “recession” had increased dramatically recently.

The economists added that the Fed’s rate hikes – through their impact on bond yields and mortgage costs – have already hit the housing market, a key part of the US economy.

US recessions are assessed by the National Bureau of Economic Research. It Are defined it as a period of significant declines in activity across the economy lasting longer than a few months.

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