Bank of America analysts have issued a new set of predictions for the US economy, and they are sounding the alarm for trouble ahead.
In a note published two days after the Fed hiked the benchmark fed funds rate 0.75%, analysts said the Fed has been too slow to act if they had intended to get control of inflation, which is presently at a 40 year high.
As a result, the analysts reduced their forecasted GDP growth to almost zero by the second half of 2023, due to how much more the Fed with have to tighten monetary policy, compared to a scenario where they had acted sooner. And while analysts do not see a recession this year as likely, they see a 40% risk of recession for next year, and they say the chance of a rebound in 2024 is unlikely.
The report they issued said, “Our worst fears around the Fed have been confirmed: they fell way behind the curve and are now playing a dangerous game of catch up.”
Because they fell behind, BoA’s analysts now say they do not think the Fed can get inflation down to the 2% target the Central Bank set, and it will persist at around 3%. While supply chain issues will ease, and demand will cool, inflation expectations will keep prices high, and wage pressures will probably not reverse without substantially more unemployment than is predicted.
However they do add that the recent 0.75% hike shows the Fed is catching on, and it was a strong step in the right direction. Unfortunately the analysts say they are not sure the Fed will know what to do as it tightens the monetary supply. They wrote, “Our baseline forecast assumes the Fed will be like a deer in the headlights: unsure over whether to react to very weak growth or still high inflation.”
Even as bad as the picture they paint is, the analysts say they still see even more downside risk, specifically citing the Ukraine war, energy prices, and international sanctions possibly being extended to Russian allies like China. However the biggest risk they see is the Fed actually trying to reach its 2% inflation target, as they say that will trigger a recession.
However factors they may not be accounting for are China coming out of lockdowns, which would loosen supply and lower prices, and most importantly, Russia accomplishing its objectives in Ukraine, and ending its military activity there. With European leaders starved for gas, the US 2024 election cycle coming up fast, and politicians desperate to improve the economy before then, lifting Russian sanctions would be a fast way to flood the market with cheap energy, and lower costs to everyone all around, making reelection easier for everyone in office now.
For now however, Jerome Powell reiterated the Fed’s policy on Friday, saying, “my colleagues and I are acutely focused on returning inflation to our 2% objective.”
The bright side Bank of America’s analysts noted was, if the Fed does trigger a recession through tightening, it will be easier to manage by merely loosening monetary policy to warm the economy back up.
