Forecasters see growing risk of recession as Fed raises rates this year to fight inflation

U.S. Federal Reserve Chairman Jerome Powell testifies before the House Financial Services Committee on “The Semi-Annual Report on Monetary Policy to Congress,” in Washington, DC, March 3, 2022.

Jonathan Ernest | AFP | Getty Images

Forecasters have raised their recession outlook and raised their inflation projections as the Federal Reserve faces the dilemma of rapidly rising prices and greater uncertainty from Russia’s invasion of Ukraine, according to the latest CNBC Fed survey.

The probability of a recession in the United States has been raised to 33% over the next 12 months, up 10 percentage points from the February 1 survey. The probability of a recession in Europe is 50%.

Respondents wondered whether the recent surge in commodity prices would cause the Fed to raise rates more quickly because it increases inflation or to raise rates less because they reduce growth.

“The fiscal impact of rising commodity prices is likely to slow the pace of the rise more than the inflationary impact accelerates it,” wrote Guy LeBas, chief fixed income strategist at Janney Montgomery. Scott.

But Rob Morgan, senior vice president at Mosaic, wrote: “I expect six quarter-point rate hikes from the Fed in 2022. If the CPI reaches 9% in the report of March or April, the Fed could be pushed to a 50 basis point hike in May.”

The 33 respondents, which include fund managers, strategists and economists, predict the Fed will raise rates an average of 4.7 times this year, taking the funds rate at year-end to 1.4. % and to 2% by the end of 2023. Nearly half of respondents see the central bank increasing five to seven times this year.

The rate hike cycle should end at a maximum policy rate of 2.4%, roughly the Fed’s neutral rate. But half of all respondents think the central bank may eventually have to raise rates above neutral to get inflation under control.

Propelling the rate increases, the consumer price index is forecast to peak at 8.5% in March, but gradually decline to end the year at a still high 5.2%. That’s almost a full percentage point higher than the February survey. The CPI in 2023 is expected to edge up 3.3%, still above the Fed’s target.

“We could be on the verge of raising Fed rates at the same time there is a minus sign ahead of GDP,” wrote Peter Boockvar, chief investment officer of Bleakley Advisory Group. “What a terrible situation, but until inflation drops sharply, they have no choice but to keep going.”

Recession is not the reference case

Although a recession is seen as a greater possibility than in February, this is not the baseline case for most respondents. The average GDP forecast for this year fell 0.8 percentage points, but remains at a slightly above trend level of 2.8%. The GDP forecast for 2023 is down about half a point from the last survey to 2.4%.

Inflation forecasts were already high for this year, but Russia’s invasion of Ukraine has made matters worse, with almost 90% saying they have raised their inflation outlook for 2022 due to the war. They added an average of 0.8 percentage point to their inflation forecast. Sixty percent of respondents said they had cut GDP forecasts due to the conflict, averaging half a point.

While inflation expectations have risen and growth prospects have fallen, the outlook for equities is relatively optimistic. Respondents have downgraded their outlook for stocks, but only 53% now say stocks are overvalued relative to earnings and growth prospects. That’s down from 88% a year ago, and the least bearish respondents have been since the start of the Covid pandemic.

Meanwhile, CNBC’s risk-reward ratio (measuring the likelihood of a 10% correction versus the likelihood of a 10% increase over the next six months) improved to -9 from -14. , which means that a negative correction is considered less likely. The S&P 500 outlook fell to 4,431 this year, suggesting stocks could be up 6% from the current level.

Forecasters see growing risk of recession as Fed raises rates this year to fight inflation

Source link Forecasters see growing risk of recession as Fed raises rates this year to fight inflation

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