Economists Foresee Worsening Recession as Federal Reserve Continues to Hike Rates

Federal Reserve Board Chairman Jerome Powell takes questions during a news conference following a Federal Open Market Committee meeting, at the Federal Reserve Board Building in Washington, on Nov. 2, 2022. Mandel Ngan/AFP via Getty Images

With the Federal Reserve indicating that it has no intention to stop hiking interest rates until inflation cools down, experts are worried that such actions would end up plunging the country further into recession.

The 12-month Consumer Price Index (CPI), which measures annual inflation, has stubbornly remained at or above 7.5 percent for every single month this year. On Wednesday, the Fed announced its fourth consecutive interest-rate hike of 0.75 percent, pushing the benchmark interest rates to a range of 3.75–4.00 percent, which is up from the rate of 0.25 percent at the beginning of the year.

“Each adverse [inflation] report and each adverse development in the outside world implies the Fed is going to have to do more in order to bring the situation under control,” said David Wilcox from the Peterson Institute for International Economics, according to the Financial Times.

“Doing more means a higher probability of a recession, and if [it] happens, in all likelihood a deeper recession.”

During a press conference on Nov. 2, Fed Chair Jerome Powell dashed investor hopes that the central bank might ease down its monetary tightening.

Such expectations are “very premature,” and the agency has “still some ways to go” as far as raising interest rates is concerned, he said, while adding that the ultimate level of interest rates will be “higher than previously expected.”

During the September meeting of the Federal Open Market Committee, the Fed had projected interest rates to go up to 4.4 percent this year and then hit 4.6 percent in 2023, before cooling down in 2024.

A survey of 40 economists by Bloomberg last month found that they expect interest rates to reach 5 percent by March 2023. While 75 percent of the economists expect a recession in the next two years, the majority of remaining experts foresee a hard landing with a period of negative or zero growth.

Mild Recession?

Some economists think that the recession hitting the United States would be a mild one. But not according to Aneta Markowska, chief financial economist at Jefferies in New York.

“It could start out feeling like a mild recession, but then intensify as we move through time,” she said to Bloomberg. Markowska expects an economic downturn to kick in during the third quarter of next year, to eventually push the unemployment rate to around 7 percent.

The sentiment among businesses is also negative. A survey by the Conference Board published last month found that 98 percent of CEOs were preparing for a recession in the United States.

According to the October 2022 National Association for Business Economics (NABE) survey, two-thirds of business economists believe that the United States is either already in a recession or has a “more than even likelihood” to be in one over the next 12 months.