A resilient U.S. economy is likely to dodge a recession if the Federal Reserve is done raising interest rates, but growth is bound to slow in the next year because of higher borrowing costs.
So say the top economists at the biggest U.S.-based banks. They predict gross domestic product will slow to 1.2% in 2024 from an estimated 2% this year as higher rates take a bite out of growth.
Yet economists are also increasingly optimistic that the Fed can achieve a rare “soft landing” — raising rates just enough to bring down high inflation without triggering a recession.
As recently as last spring, most economists believed a recession was inevitable. Only once or twice in its history has the Fed pulled off a soft landing.
Skepticism of a soft landing is well warranted by the historic record, acknowledged Simona Mocuta, chair of the economic advisory committee of the American Bankers Association.
“It is true you are arguing for something that is atypical,” said Mocuta, who is also chief economist at State Street Global Advisors.
The ABA-affiliated economists pointed to the still-strong labor market and the first increase in a few years in inflation-adjusted incomes. These trends are likely to keep consumer spending — the main engine of the economy — revving just enough to keep the U.S. growing.
At the same time, inflation pressures have eased enough to give the Fed the scope to stop raising interest rates and even cut them by up to 1 percentage point by next year.
“Given both demonstrated and anticipated progress on inflation, the majority of the committee members believe that the Fed’s tightening cycle has run its course,” Mocuta said.
“However, the battle against inflation is not yet won, so the Fed must remain vigilant,” she added.
The ABA panel forecast the yearly rate of inflation, using the consumer-price index, to slow to 2.2% by 2024 from a current level of 3.2%. The Fed’s preferred inflation gauge, the personal consumption expenditures index, should decelerate to the same range, they predict.
The Fed’s inflation target is 2%.
A sharp increase in interest rates in the last year and a half, however, is likely to exert more pressure on the economy in the months ahead, the ABA economists say. Consumers are expected to cut back on spending, and businesses have already scaled back investment.
The slowdown in U.S. growth is likely to nudge unemployment to 4.4% by next year from the current level of 3.8% and cool off an overheated labor market.
Yet Mocuta said a big increase in unemployment, which usually happens when interest rates surge, is unlikely. Companies have been more hesitant to lay off workers because of a chronic labor shortage and greater difficulty in hiring.