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US Economics Weekly

Fed refuses to blink, as growth fears mount

Chair Jerome Powell signalled this week that the Fed will press ahead with its planned series of aggressive interest rate hikes, even as evidence mounts that economic growth will be weak in the second half of the year.

24 June 2022

US Chart Book

Recession fears overdone

The surge in interest rates, plunge in the stock market and weakness of consumer confidence have fuelled fears of an impending recession, but there is still little sign of that in the incoming economic data. The coincident indicators used by the NBER to identify economic turning points show continued growth. The strength of payroll employment growth, which is averaging close to 400,000 per month, is particularly hard to square with claims that a recession is imminent. Admittedly, with inflation rampant, that is likely to keep the Fed raising interest rates aggressively, including another 75bp hike in July. But with underlying demand still strong, a slowdown in growth is still the more likely outcome.

23 June 2022

US Economics Weekly

Economy still bending rather than breaking

Evidence that economic growth has rebounded in the second quarter, alongside the likelihood of a further big rise in consumer prices in June, suggest that the Fed will press ahead with another super-sized 75bp rate hike at the next FOMC meeting in late July.
Markets Drop-In (22nd June, 10:00 ET/15:00 BST): Join our Markets team for this special briefing on the outlook for equities, bonds and FX and a discussion about revisions to our forecasts. Register now

17 June 2022

Key Forecasts

Main Economic & Market Forecasts

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

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

2022

2023

2024

GDP

-1.5

+2.7

+1.0

+1.1

+1.0

+1.3

(+2.3)

(+1.2)

(+1.5)

CPI Inflation

(+8.0)

(+8.5)

(+8.0)

(+6.1)

(+4.0)

(+2.3)

(+7.6)

(+2.2)

(+1.4)

Core CPI Inflation

(+6.3)

(+6.0)

(+5.7)

(+4.9)

(+4.1)

(+3.7)

(+5.7)

(+3.6)

(+2.9)

Unemp. Rate (%), Period Ave.

3.8

3.7

3.7

3.6

3.6

3.7

3.7

3.7

3.9

Fed Funds Rate, End Period (%)

0.25-0.50

1.50-1.75

2.75-3.00

3.50-3.75

3.75-4.00

3.75-4.00

3.50-3.75

3.75-4.00

3.50-3.75

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

2.35

3.25

3.75

4.00

4.00

3.90

4.00

3.75

3.25

S&P 500, End Period

4500

3600

3500

3400

3350

3300

3400

3200

3600

$/€, End Period

1.10

1.04

1.02

1.00

1.03

1.05

1.00

1.10

1.15

¥/$, End Period

122

132

136

140

138

135

140

130

120

Sources: Refinitiv, Capital Economics


Fed refuses to blink, as growth fears mount

US Economics Weekly

26 June 2022

Our view

The risks of a recession over the coming months are still low, but the impact of higher energy prices and interest rates means real economic growth will be consistently below its 2% potential pace over the next couple of years. With inflation set to remain elevated over the next few months, we expect the Fed to deliver another 200bp of hikes this year, with another 75bp move in July. We still expect a fall in core inflation and well below-trend growth to prompt the Fed to slow the pace of hikes later this year, and to stop hiking rates altogether in the first quarter of 2023, with the fed funds rate peaking at 3.75-4.00%.

Latest Outlook

US Economic Outlook

Economy will bend not break under higher rates

We expect the economy to bend rather than break under the pressure of a rapid monetary tightening by the Fed. We anticipate that real economic growth will remain consistently below its 2% potential pace over the next two-and-a-half years, but the risks of a recession remain limited. As global supply shortages gradually improve and commodity prices drop back, lacklustre domestic demand growth will drive inflation lower too, although core inflation won’t get back to target until 2024.

12 April 2022