US heading into shallow recession, no respite from rate hikes yet

“The US economy is heading into a short and shallow recession over the coming year,” according to economists polled by Reuters. The survey also reports that the economists unanimously expected the U.S. Federal Reserve to go for a smaller 50 basis point interest rate hike on Dec. 14.

Key findings

The Fed has another half-point at least to go with rates early in the new year with inflation still running well above the Fed's 2% target even though economists put a steady 60% probability on a recession taking place in 2023.

After raising the federal funds rate 75 basis points at each of the previous four meetings, all 84 economists polled Dec. 2-8 expected the central bank to go for a slightly softer half a percentage point to 4.25%-4.50% this time.

While the central bank is attempting only to deliver some pain and not a full-fledged downturn, economists, who tend to be slow as a group in forecasting recessions, raised the probability of one in two years to 70% from 63% previously.

That suggests investors and stock markets may have gotten ahead of themselves with optimism over the past month that the world's largest economy may skirt a recession entirely. That is already showing up in safe-haven flows to the U.S. dollar.

Although the fed funds rate is expected to peak at 4.75%-5.00% early next year in line with interest rate futures, one-third of economists, 24 of 72, expected it to go higher.

Around 60% of economists, 27 of 45, who provided quarterly gross domestic product (GDP) forecasts, predicted a contraction for two straight quarters or more at some point in 2023.

A large majority of economists, 35 of 48, said any recession would be short and shallow. Eight said long and shallow, while four said there won't be any recession. One said short and deep.

Over 75% of economists, 29 of 38, who answered a separate question said the risk to their GDP forecasts was skewed to the downside.

Also read: US Dollar Index struggles to defend the first weekly gain in three ahead of key consumer-centric data

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