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A blog by Leon Oudejans

The next U.S. recession (Bloomberg)

22 December 2021


Bloomberg title: The next U.S. recession
By: Simon Kennedy
Date: 16 December 2021

“The late economist Rudiger Dornbusch once said that most U.S. expansions are “murdered by the Federal Reserve.”

That wasn’t the case with 2020’s pandemic-led slump, but some are starting to wonder if the central bank’s anti-inflation pivot paves the way for the economy to contract at some point.

For readers needing a catch up, Fed Chair Jerome Powell and colleagues on Wednesday:

  • Opened the door to ending the central bank’s massive asset-purchase program by March rather than June
  • Projected boosting interest rates three times in 2022 with further increases to follow in 2023 and 2024
  • Raised the possibility that the Fed will begin reducing its huge balance sheet.

The reason? Inflation is now the Fed’s No. 1 enemy having previously viewed it as “transitory” and given more weight to improving the labor market.

Powell said rising prices are now “one of the two big threats” to restoring maximum employment, alongside the pandemic. 

Note LO: see Bloomberg article for diagram regarding “Stiffer inflation winds”.

Bank of America economists were quick off the blocks in predicting the first hike will come in March.  

The hope is the Fed can deliver a rare soft landing, reining in accelerating prices with gradual increases in rates that don’t materially damage out. Rallying stocks seemed supportive of that view.

Others are more worried:

“The Fed had fallen behind the curve in terms of its rhetoric and actions in regard to containing the threat from inflation,” said Mark Vitner of Wells Fargo. “In the past, it has proven very difficult to slow inflation when the economy is at full employment and real GDP is growing faster than its potential. That is where we will be in 2022.”

At Deutsche Bank, strategist Jim Reid estimates the median and average time to a recession is 37 and 42 months after the first hike, respectively.

If the Fed hikes in June, that would point to a slump starting in July 2025 or December 2025. The earliest gap over 13 cycles studied is just eleven months which would mean the U.S. would begin nosediving in May 2023.

Taking the bond yield curve as a guide and using its historical shifts, a June 2022 hike may mean two-year yields fall below those of 10-years by June 2023, according to Reid. Recessions tend to occur around 18 months after that typically occurs, pointing to a recession at the end of 2024.

Prior to the pandemic, the earliest a recession occurred after an inversion was nine months, which would mean March 2023.

“At this stage, history would suggest a U.S. recession in 2024 or 2025 is a realistic assumption.”  Reid told clients in a report. “It could come earlier but that would assume the earlier end of the historical template.”

Note LO: originally sent by email newsletter.



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