(Kitco News) More and more banks and economists are leaning towards a hard landing in 2023 as high interest rates start to bite. But a recession is not a done deal yet, even though the U.S. economy is on thin ice going into next year.
After a rapid interest rate hiking cycle by the Federal Reserve, macroeconomic data is finally showing signs of cooling, with the biggest hit to the economy yet to come.
Fed Chair Jerome Powell has reiterated a few times already that the full effects of this year's total 425-basis-point rate increase are yet to be worked through the economy.
On the possibility of a soft landing, Powell also noted that the longer the Fed needs to keep rates higher, the narrower the runway becomes. "I don't think anyone knows whether we're going to have a recession or not. And if we do, whether it's going to be a deep one or not, it's just not knowable," he said in December.
Despite the Fed Chair not being able to forecast a recession, the Fed is looking for real GDP to come in at 0.5% in 2023, the PCE inflation to slow to 3.1%, and the federal funds rate to peak at 5.1%.
What the big banks are saying
The big banks have weighed in on what to expect next year, and some see a soft landing as their base case scenario.
Goldman Sachs stated that the U.S. economy could avoid a recession. "There are strong reasons to expect positive growth in coming quarters," Goldman Sachs' chief economist Jan Hatzius said in the 2023 outlook.
Goldman sees core inflation slowing to 3%, the unemployment rate rising 0.5 percentage points, and the U.S. economy growing 1% next year.
However, the bank noted a "distinct risk" of a downturn, with a chance of a recession at 35% next year.
"We expect the FOMC to slow the pace of rate hikes as it shifts to fine-tuning the funds rate to keep growth below potential, but to ultimately deliver a bit more than is priced … with three 25bp hikes next year raising the fund's rate to a peak of 5-5.25%," Hatzius said. "Our recession odds are below consensus even though our Fed forecast is slightly more hawkish than consensus because we expect demand to prove more resilient than expected next year."
Morgan Stanley projects that "the U.S. economy just skirts recession in 2023, but the landing doesn't feel so soft as job growth slows meaningfully and the unemployment rate continues to rise."
Nevertheless, risks remain "skewed to the downside" because of high interest rates, noted Morgan Stanley's chief U.S. economist Ellen Zentner.
Morgan Stanley estimates that rates will remain elevated for almost the whole year.
Credit Suisse believes the U.S. can avoid an economic downturn next year as inflation slows and the Fed pauses rate hikes. In 2023, the bank sees the U.S. economy growing 0.8%.
On a more bearish side, JPMorgan has warned that a recession is very likely next year. "Our view is that market and economic weakness may occur in 2023 as a result of central bank overtightening, with Europe first and the U.S. to follow later next year," JPMorgan's chief global markets strategist Marko Kolanovic said in his 2023 outlook. "While there is significant uncertainty on the timing and severity of this downturn, we think that financial markets may react sooner and more violently than the economy itself."
Bank of America forecasts a recession in the first quarter of 2023, with the GDP falling 0.4% next year. The bank forecasts the unemployment rate to rise to 5.5% and inflation to fall to 3.2% by 2024.
UBS is also calling for a recession in 2023, citing high interest rates and projecting near-zero growth for the U.S. next year and in 2024. "We think the U.S. expansion is headed for a hard landing," UBS' chief U.S. economist Jonathan Pingle said in the 2023 outlook.
Wells Fargo is pricing in a recession in the third quarter of next year as the dramatic rise in rates hurts demand.
"We expect the Fed to continue tightening policy through the first quarter of next year, with the fed funds rate peaking at 5.25% this cycle … That said, we do not expect the Fed to cut rates immediately at the first sign of weakness. Specifically, we expect the Committee to stay on hold for the rest of 2023, and we look for the first rate cut in Q1-2024," the bank said.
Capital Economics is looking for the U.S. to enter into a mild recession next year, with the Fed forced to cut rates before the end of 2023. The GDP is expected to rise 0.2% over the next year, and core inflation to slow to 3.2%.
"We expect the lagged impact of higher interest rates to push the U.S. economy into a mild recession next year. Although that downturn will be accompanied by only a modest rebound in the unemployment rate, we expect both headline and core inflation to fall rapidly, eventually convincing the Fed to begin cutting rates before the end of 2023," Capital Economics said in its outlook.
Can the Fed reach 5% next year?
Billionaire "Bond King" Jeffrey Gundlach sees the Fed moving another 50 basis points in February, with rates potentially peaking at 5% next year.
But what's more important is that the Fed won't be able to keep rates at that level for more than one meeting and will be forced to cut, DoubleLine Capital CEO Gundlach said during a December webcast.
"You get to 5%, you repeat it, and then the market thinks it will start falling," he said. "The bond market is pricing in that the fed funds rate one year [later] will be the same as the fed funds rate at the December meeting. This leads me to wonder why even bother with these hikes? Dig a hole just to fill it back in."
Gundlach even warned that the Fed might not even make it to 5% as the data is "weakening too rapidly."
The Fed moving rates up so quickly is not usually good for stable policy, said Gainesville Coins precious metals expert Everett Millman. "The U.S. economy will fluctuate widely from that … I think there will be a pause on rate hikes sooner than projected. Next year, the damage will be clearer," Millman said.
The Fed is always working with backward-looking data, which makes its job much harder. "It's difficult for them to see problems in the economy until it is too late. They could follow through and push rates near 5% because they want to appear to be handling inflation," Millman added.
U.S. economy on thin ice: These are top recession bets for 2023 - Kitco NEWS
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