The US will experience “zero” growth in 2023 and is on the brink of recession, economists say, as a result of rising interest rates orchestrated by the Federal Reserve to curb high inflation.
Top economists at the American Bankers Association say the resulting slowdown is likely to trigger a sharp spike in layoffs and push the unemployment rate to nearly 5% within the next two years. A rapid increase in wages in the past year is also likely to come to an end.
However, the deteriorating economy and sluggish job market will also help the Fed bring inflation down faster.
The ABA projects inflation to slow to 2.8% in 2023 and 2.2% in 2024, from an average rate of 6.4% a year earlier, based on the consumer price index.
That would bring the inflation rate close to the Fed’s 2% target a bit faster than the central bank had forecast.
“The wheels are in motion for inflation to moderate,” said Simona Mocuta, chair of the ABA Economic Advisory Board and chief economist at State Street Global Advisors.
In that scenario, the Fed would actually start cutting rates before the end of 2023, the ABA economists predicted, and help spur a modest recovery into 2024.
Senior Fed officials have warned that it is premature to say the tide has turned in the fight against inflation. They plan to hike a key short-term US interest rate a few more times this year, take it above 5% and leave it at elevated levels for an extended period before re-evaluating the economy.
The inflation rate rose to a 40-year high of 9.1% last summer but has since slowed to 6.5%. However, that’s still more than triple the annual pre-pandemic price increase.
But not all ABA economists were optimistic that the economy could sidestep a recession and avoid higher unemployment.
“Others are more concerned about the ability to achieve that kind of Goldilocks outcome, and perhaps more pain in the labor market is needed to enable that outcome in inflation,” Mocuta said.
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