US

US Economics Weekly

Fed becoming more hawkish by the day

The continued surge in Omicron infections suggests that the disappointing December activity data will be followed by further weakness in January, but there are no signs that it will delay the Fed’s accelerating plans to tighten policy.

14 January 2022

US Data Response

Industrial Production (Dec.)

The 0.3% m/m decline in manufacturing output is probably a sign that Omicron-related employee absenteeism was already weighing on output by the end of last year. We expect an even bigger hit in January but, assuming that the surge in infections peaks soon, any losses in output should be fully reversed in February and March.

14 January 2022

US Data Response

Retail Sales (Dec.)

The 1.9% plunge in retail sales in December in part reflects what appears to be a problem with seasonal adjustment process around the holidays. The initial Omicron wave appears to have had only a modest impact. Nevertheless, it means fourth-quarter real consumption growth was a more muted 3.5% annualised, rather than the near-5% we were expecting.

14 January 2022

Key Forecasts

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

2021

2022

2023

GDP

+2.3

+4.0

+1.5

+2.

3

+2.

4

+2.

2

(+5.6)

(+2.7)

(+2.0)

CPI Inflation

(+5.3)

(+6.6)

(+6.1)

(+4.1)

(+2.9)

(+2.0)

(+4.6)

(+3.8)

(+2.9)

Core CPI Inflation

(+4.1)

(+5.0)

(+5.9)

(+4.4)

(+3.7)

(+3.2)

(+3.6)

(+4.3)

(+3.1)

Unemp. Rate (%), Period Ave.

5.1

4.2

3.9

3.7

3.6

3.5

5.4

3.7

3.5

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.25-0.50

0.50-0.75

0.75-1.00

1.00-1.25

0.00-0.25

1.00-1.25

2.00-2.25

10y Treas. Yld., End Period (%)

1.52

1.51

1.75

1.90

2.10

2.25

1.51

2.25

2.75

S&P 500, End Period

4308

4766

4750

4800

4850

4900

4766

4900

5150

$/€, End Period

1.16

1.14

1.12

1.10

1.09

1.08

1.14

1.08

1.05

¥/$, End Period

111

115

116

117

119

120

115

120

122

Sources: Refinitiv, Capital Economics


Fed becoming more hawkish by the day

US Economics Weekly

19 January 2022

Our view

Although we expect inflation to fall back in the first half of 2022, as energy prices drop back and supply shortages ease, we believe that rising cyclical pressures will prevent core inflation from falling back below the Fed’s 2% target. As a result, following three interest hikes next year, we expect the Fed to hike rates an additional four times in 2023, with the fed funds rate peaking at more than 2% in 2024. After a 5.8% gain in 2021, we expect GDP to increase by a more modest 3.0% in 2022, with the tightening in financial conditions meaning that growth is likely to slow to only 2.0% in 2023.

Latest Outlook

US Economic Outlook

Whiff of stagflation gets stronger

The whiff of stagflation is getting stronger as shortages worsen, leading to surging prices and weaker real GDP growth. Shortages of goods and intermediate inputs will eventually ease, although not for at least six to 12 months. But the drop in the labour force appears to be more permanent, which suggests the pandemic could have a long-term scarring effect on potential GDP after all. We now expect GDP growth to be 2.7% in 2022 and 2.0% in 2023 and we expect CPI inflation to be around 3.0% in both years. We assume the Fed will focus on the weakness in the real economy rather than the sustained overshoot in inflation, however, and are forecasting only two interest rate hikes in 2023.

18 October 2021