The US economy will tip into a 'mild' recession next year as the Fed winds down rate hikes - but a hard landing could be coming, JPMorgan says

The US economy will tip into a 'mild' recession next year as the Fed winds down rate hikes - but a hard landing could be coming, JPMorgan says
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  • The Fed's tightening campaign will continue, with 100 basis points more remaining until March, JPMorgan analysts wrote.
  • The Fed's moves will tip the economy into a mild recession in 2023, they predicted.

The Federal Reserve still has room to run its it campaign to tighten the screws on the economy, and its efforts will probably tip the US into a recession in 2023, according to JPMorgan.

Analysts led by Michael Feroli forecasted in a Wednesday note to clients that the Federal Open Market Committee meeting in December will result a half-point hike, and that investors should expect 25 basis-point hikes at both the February and March meeting. Even that dialing down of rate hikes, however, is still likely to slow the economy enough to result in a recession, they noted.

"The almost 500bp of expected cumulative hikes is already delivering a commensurate tightening of financial conditions," the analysts wrote. "[W]hich we believe will tip the economy into mild recession later next year."

Aggressive moves from the Fed will continue because inflation has proven stubborn. Even as last month's CPI reading showed signs of easing, and came in below expectations, it remains 7.7% higher year-over-year.

In particular, the Fed will be watching the labor market, which has stayed red-hot throughout 2022.


"By most measures hourly wage growth is currently running around 5%," the analysts wrote. "That likely needs to run closer to 3.5% before policymakers can feel more comfortable about returning to 2% inflation. And that sort of wage growth deceleration will likely require an unemployment rate between 4% and 5%, depending on how entrenched wage growth expectations have become."

As part of the bank's forecast, it expects that the US economy could lose over a million jobs by the middle of 2024. That labor market weakness, then, will convince the Fed that it's generated enough "disinflationary impetus" to adjust policy to a more neutral stance.

Still, if a recession does arrive, analysts don't expect it be severe because everyday Americans and Fed officials alike have had a massive runway to anticipate the downturn, and will be able to adjust spending accordingly.

"If we do have a downturn next year, it will be the most well-telegraphed recession in modern memory," JPMorgan said. "That fact alone should change the nature of the slowdown."

Illustrating this pumping of the brakes, shares of Target dropped 15% Wednesday, as the retailer slashed its outlook for the fourth quarter to account for less spending from shoppers amid higher rates and a downbeat economic sentiment.


Thanks to abating pandemic-related inflationary pressures, JPMorgan's analysts expect CPI to cool to 7.0% in December, and then eventually to 3.4% by September of next year. Prices will fall back to earth as supply chain snags alleviate and the surge in pent-up demand fades away, too, which will help keep any downturn mild.

"As the Fed continues to push policy further into restrictive territory into early next year, we expect the now-tight labor market to loosen as well," analysts maintained. "Labor market conditions will be an important driver of infla-
tion both in the near term and further into the future."

Ultimately, between the labor market historic inflation, the Fed still faces a steep challenge in trying to skirt a hard landing for the economy, JPMorgan said. "Calibrating monetary policy to maintain a soft landing will prove to be a very difficult task," the analyst wrote.