Two-thirds of economists surveyed by The Wall Street Journal predict a recession will occur this year as the Federal Reserve raises interest rates to try to get inflation under control.
The Journal surveyed economists at 23 large financial institutions that do business with the Fed and found that most believe a recession will happen this year. Economists at two firms expect a recession will take place next year.
The survey covered a group of trading firms and investment banks known as primary dealers. Respondents mentioned a few reasons for concern, noting that Americans are spending the money they saved during the COVID-19 pandemic, the housing market is declining and banks are tightening their standards for lending money.
Fed data shows that the savings people built up at the peak of the pandemic has dropped from $2.3 trillion to $1.2 trillion, and Deutsche Bank analysts expect the savings will be fully exhausted by October.
The Journal reported that almost 40 percent of U.S. banks were tightening their lending standards in the fourth quarter of 2022.
That could be a sign that banks are expecting a recession, as banks generally tightened their lending standards ahead of recessions in 2008 and 2020, according to the Federal Reserve Bank of St. Louis.
Economic experts have indicated concern that the Fed’s aggressive increases in interest rates over the past year could cause an economic downturn, but the economy has shown resilience in continuing to add jobs.
Still, Fed Chairman Jerome Powell has indicated a willingness to continue to raise interest rates as much as is necessary to get inflation to the central bank’s target of around 2 percent.
After four straight increases of 0.75 points, the Fed did slow its increase in rates to 0.5 points last month as inflation showed signs of abating. But the annual inflation rate was still 7.1 percent in November.
A majority of the economists in the Journal’s survey said they believe the higher interest rates will increase the unemployment level from 3.7 percent recorded in November to more than 5 percent, which would still be historically low but represent millions losing their jobs.
Respondents said the effects of the interest rate increases will be more noticeable this year than last year.
Most economists said the recession will likely be mild and they expect the economy to rebound later in the year largely as a result of the Fed starting to cut rates. Only five of the financial institutions surveyed said they do not expect a recession this year or next year.