US Macro Outlook | Banking on a mild recession

Credit squeeze, growth downturn, and peak policy rate.
The Fed is very close to reaching peak policy rate.
  • Recent banking sector stress, although stabilizing, is likely to tighten financing conditions and further raise the probability of a recession in the US. We expect a recession starting from H2, with Q2 growth now downgraded close to zero. Cyclical spending more dependent on credit, including inventories and business investment, should weaken further.
  • Weaker growth should help cool the labor market and reduce medium-term inflation risks, with a lag. We continue to expect core PCE inflation to slow to an above-target 3.5% by year end, with no wage-price spiral. Housing inflation is likely to fall more markedly in coming months, along with a gradual deceleration in core services and goods inflation.
  • The Fed is very close to reaching peak policy rate. It remains a close call whether the FOMC will hike rates by 25bps or pause in May. The decision will come down to whether officials place more emphasis on solid, but lagging, fundamental economic data, or deteriorating, but leading, credit condition signals. Given the long and variable lags of policy tightening, it may be prudent for the Fed to wait and assess. Either way, if the Fed hikes in May, we believe it is going to be the last one this tightening cycle.
  • We still see no rate cuts this year due to above-target inflation, but risks emerge if there is a severe credit crunch. We don’t expect changes to quantitative tightening in 2023 but wouldn’t rule out an earlier stop as we approach levels of bank reserves scarcity.
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