- Wells Fargo said the US economy will slide into recession in 2023 after the Fed hiked rates the most since 1994.
- The Fed’s move prompted Wall Street analysts to lower their growth expectations for the US economy.
- The central bank itself expects to cut rates in 2024, suggesting it expects a sharp slowdown in growth.
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Wells Fargo economists said on Wednesday they expect the US to slide into a recession in 2023 after the Federal Reserve hiked interest rates by the largest amount since 1994 in a bid to stave off inflation.
The Fed’s move prompted a rethink on Wall Street about the US growth outlook, with analysts across the board saying risks of a recession were mounting.
The central bank hiked interest rates by 75 basis points on Wednesday – much more than the traditional 25 basis point hike – to bring the target range for the key interest rate to 1.5% to 1.75%.
Fed officials said they are targeting a rate hike to around 3.8% in 2023 as things stand.
Wells Fargo said the sharp rate hikes that will raise the cost of borrowing across the economy are likely to trigger a “mild recession” in mid-2023.
The bank’s chief economist, Jay Bryson, previously thought the Fed could tame inflation without dramatically slowing growth.
“In our view, the recession will be more or less the same as the 1990-1991 downturn in scale and duration. This recession lasted for two quarters with real GDP contracting by 1.4 to bottom,” Bryson said in a note to clients Wednesday.
Wells Fargo wasn’t the only one to turn more pessimistic about the US economy on Wednesday.
Seema Shah, chief strategist at Principal Global Investors, said the Fed’s updated economic forecasts indicated a recession could be near, even as Chair Jerome Powell told reporters such a fate could yet be avoided.
“The Fed has abandoned its ‘flawless disinflation’ scenario, admitting instead that unemployment is likely to rise if there is any hope of lowering inflation,” she said.
“And while a recession isn’t specifically in their forecast, the 0.5% rise in the unemployment rate by the end of 2024 certainly points to a recession.”
The Fed’s own “dot plot,” which depicts officials’ views on the direction of interest rates, showed that the cost of borrowing is expected to fall to about 3.4% in 2024.
“There is an economic cost to acting harder and faster,” said James Knightley, chief international economist at Dutch bank ING. “Rising recession risks mean rate cuts are on the agenda in the summer of 2023.”
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