Forecasters sees growing chance of a recession as Fed hikes rates this year to fight inflation

US Federal Reserve Chairman, Jerome Powell, testifies before the House Financial Services Committee on “The Semiannual Monetary Policy Report to the Congress,” in Washington, DC, on March 3, 2022.

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Forecasters have raised their outlooks for a recession and boosted their inflation outlook as the Federal Reserve faces the quandary of fast-rising prices and greater uncertainty from Russia’s invasion of Ukraine, according to the latest CNBC Fed Survey.

The probability of recession in the US was raised to 33% in the next 12 months, up 10 percentage points from the Feb. 1 survey. The chance of a recession in Europe stands at 50%.

Respondents debated whether the recent surge in commodity prices would prompt the Fed to raise rates faster because it adds to inflation or raise rates less because they reduce growth.

“The tax impact of higher commodities prices is likely to slow the pace of hiking more than the inflationary impact is to accelerate it,” wrote Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

But Rob Morgan, senior vice president at MOSAIC, wrote, “I expect six quarter-point rate hikes from the Fed in 2022. If CPI reaches 9% in the March or April report, the Fed might be pressured into a 50-basis point hike in May.”

The 33 respondents, who include fund managers, strategists and economists, forecast the Fed will hike rates an average of 4.7 times this year, bringing the funds rate to end the year at 1.4% and to 2% by the end of 2023. Nearly half of the respondents see the central bank hiking 5 to 7 times this year.

The rate hike cycle is seen ending at a peak funds rate of 2.4%, about the Fed’s neutral rate. But half of all respondents believe the Fed may ultimately have to raise rates above neutral to get control of inflation.

Propelling the rate hikes are forecasts for the Consumer Price Index to peak at 8.5% in March, but gradually decline to finish the year at a still high 5.2%. That’s nearly a full percentage point higher than the February survey. The CPI in 2023 is forecast to rise a tamer 3.3%, a rate still be above the Fed’s target.

“We might be on the cusp of the Fed raising rates at the same time there is a minus sign in front of GDP,” wrote Peter Boockvar, chief investment officer of Bleakley Advisory Group. “What an awful position to be in, but until inflation falls sharply, they have no choice but to carry on.”

Recession not base case

Source: https://www.cnbc.com/2022/03/15/forecasters-sees-growing-chance-of-a-recession-as-fed-hikes-rates-this-year-to-fight-inflation.html