Wells Fargo says the US will fall into recession after the Fed delivers its biggest rate hike since 1994

June 16, 2022

Wells Fargo says the US will fall into recession after the Fed delivers its biggest rate hike since 1994

Jerome Powell Federal Reserve chairman — U.S. Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency move designed to shield the world's largest economy from the impact of the coronavirus, in Washington, U.S., March 3, 2020.
Kevin Lamarque/Reuters

Wells Fargo said the US economy will tip into a recession in 2023 after the Fed hiked interest rates by the most since 1994.
The Fed's move caused analysts across Wall Street to lower their growth expectations for the US economy.
The central bank itself envisages having to cut rates in 2024, suggesting it expects growth to slow sharply.

Economists at Wells Fargo said Wednesday they expect the US to tip into a recession in 2023 after the Federal Reserve hiked interest rates by the biggest amount since 1994 in a bid to choke off inflation.

The Fed's move prompted a shifting of views on Wall Street about the US growth outlook, with analysts across the board saying the risks of a recession are rising.

The central bank on Wednesday raised interest rates by 75 basis points — much more than the traditional 25 basis point increment — to take the target federal funds rate range to 1.5% to 1.75%.

Fed officials said that, as things currently stand, they envisage raising rates to around 3.8% in 2023.

Wells Fargo said the sharp increases in interest rates, which will raise borrowing costs across the economy, are likely to trigger a "mild recession" in mid-2023.

The bank's chief economist Jay Bryson previously thought the Fed could tame inflation without slowing growth dramatically.

"In our view, the recession will be more or less equivalent in magnitude and duration to the downturn of 1990-1991. That recession lasted for two quarters with a peak-to-trough decline in real GDP of 1.4," Bryson said in a note to clients Wednesday.

Wells Fargo was not alone in becoming more pessimistic about the US economy on Wednesday.

Seema Shah, chief strategist at Principal Global Investors, said the Fed's updated economic forecasts suggested a recession might be on the way, even if Chair Jerome Powell told reporters such a fate could still be avoided.

"The Fed let go of its 'immaculate disinflation' scenario, instead admitting that unemployment is likely to rise if they have any hope of bringing inflation lower," she said.

"And while a recession is not explicitly in their forecast, the 0.5% increase in unemployment rate by end-2024 is certainly suggestive of recession."

The Fed's own "dot plot", which maps out officials' views of where interest rates are heading, showed that borrowing costs are likely to fall to around 3.4% in 2024. That suggests policymakers expect to have to cut rates again as the economy slows.

"Moving harder and faster comes at an economic cost," said James Knightley, chief international economist at Dutch bank ING. "Rising recession risks mean rate cuts will be on the agenda for summer 2023."

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