"Probability of US Economic Recession at 28%, Jumping 10 Percentage Points in 3 Months"

[Asia Economy New York=Special Correspondent Joselgina] Due to the early tightening moves by the U.S. central bank, the Federal Reserve (Fed), the likelihood of the U.S. economy entering a recession within the next 12 months has risen to 28%. This is a 10 percentage point increase compared to the survey conducted in January, just three months ago.

On the 10th (local time), the Wall Street Journal (WSJ) reported the results of a recent survey of 65 economists, which showed a 28% chance of a recession in the U.S. economy. Joe Brusuelas, chief economist at the U.S. consulting firm RSM US, explained, "As the Fed raises interest rates to tackle inflation, a chain of supply shocks is being inflicted across the economy, increasing the risk of a recession."

Economists also downgraded their growth forecasts for the U.S. economy. The forecast for the U.S. real gross domestic product (GDP) growth rate in the fourth quarter was lowered by 1.0 percentage point to 2.6%.

Among the economists participating in this survey, 84% expected the Fed to implement a big step of raising the benchmark interest rate by 0.5 percentage points at once in May. Additionally, 57% of respondents anticipated that the Fed's big step would not end with a single hike but would be followed by 2 to 3 additional increases. According to the survey results, the midpoint of the federal funds rate is 2.125% at the end of 2022 and 2.875% in December 2023, close to the Fed's own projections.

Furthermore, they expected U.S. inflation to ease from 7.5% in June to 5.5% by the end of this year. The inflation rate close to the Fed's target of around 2% is projected to be reached only by the end of next year, at approximately 2.9%. Economists identified the main causes of inflation as 33% citing raw materials, food, and gasoline prices, and 15% pointing to the Russia-Ukraine war. Meanwhile, 27% of respondents named wage increases and a tightening labor market as the greatest inflation threats.

Philip Mare, senior U.S. economist strategist at the Dutch bank Rabobank, said, "The Ukraine crisis will boost inflation in the short term," but added, "The already initiated wage-price spiral poses a more permanent threat to price stability." He explained that wage increases lead to price increases, which in turn create further wage pressure. For this reason, he added that the Fed should raise interest rates sufficiently, even if it causes a recession.

However, 63% of economists predicted that the Fed could achieve a "soft landing" by curbing inflation without causing a recession. They assessed that the U.S. economy is in a good position to withstand the Fed's tightening, considering the near-record low unemployment rate, steadily increasing incomes, and relatively low household debt.