The US may be headed for a credit crunch that could deepen a looming recession, Citi global chief economist says

• Citi’s Nathan Sheets says the US may be headed for a credit crunch.

• Such a scenario could deepen an economic downturn and ensure a more prolonged recession.

• Tightened lending standards are a “very significant wild card [with] a downside risk that we are very, very focused on.”

Citi’s chief economist Nathan Sheets says the US may be headed for a credit crunch and a recession in the coming months, citing the Federal Reserve’s monetary tightening and ongoing fallout from bank turmoil.

The Fed has aggressively hiked interest rates over the past year to lower decades-high inflation. The central bank may keep hiking because the labor market remains tight and inflation is still far off from its 2% target.

Sheets says that this, along with a slew of bank failures last month, will not only tighten lending standards but also ensure a prolonged economic downtown.

A lending squeeze is a “very significant wild card [with] a downside risk that we are very, very focused on,” Sheets told CNBC on Thursday.

“We’ve moved from what I’ve called the acute phase of the [bank] stresses, where it’s about bank runs and uncertainties about institutions failing,” the firm’s top global economist said. “[This is] where banks are thinking about their balance sheets and asking themselves: ‘Well, can we continue to extend credit in the same way as we have over the last several years?'”

Sheets added: “And as a result of that process, we believe that there could be a credit crunch in the economy. That’s something that will unfold in [the] coming months and quarters, and could indeed make that recession that we’re expecting somewhat longer than it would be otherwise and somewhat deeper.”

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