The economic hurricane that JPMorgan CEO Jamie Dimon warned about in June may be more severe than first feared, according to a new report from the bank.
On Wednesday, JPMorgan economists Michael Feroli and Daniel Silver wrote that they see the United States in a “mild recession” in the second half of 2023 as the Fed looks to complete its mission to flatten inflation.
“We are effectively looking for a Category 1 economic hurricane,” the economists wrote. “What are the risks? Weakness could build on itself, requiring a bigger response from the Fed to get the economy back on track.”
The note comes on the heels of a better-than-expected Consumer Price Index (CPI) report, which showed signs that prices are starting to moderate amid persistently-high inflation.
The market rallied after the report as investors wondered how the positive inflation news would change the Fed’s course. Central bank officials, for their part, reiterated that more increases in interest rates would be needed to moderate inflation while acknowledging the encouraging print.
Feroli and Silver see the Fed continuing monetary tightening well into 2023 before stopping. The economists set expectations that the Federal Reserve will raise the federal funds rate by another 100 basis points, with a 0.50% hike coming in December and two additional 0.25% increases in February and March.
That would bring the federal funds rate close to 5%, a level of financial tightening that many economists think would push the US economy into recession.
At the same time, the US economy has remained relatively resilient: Job growth has remained relatively resilient against the Fed’s most aggressive inflationary cycle in years and consumers continue to spend – albeit less and less on discretionary goods .
The tight job market is likely to weaken in the coming months, Feroli and Silver warned. And even in the case of a mild recession, a weaker labor market at the Fed could cause the US to lose more than 1 million jobs by mid-2024.
“There are already signs that firms’ willingness to hire is waning, and we expect this to continue next year to the point where we see overall declines in monthly job figures in 2H23,” the economists said. “Markets are now rewarding companies that prioritize cost cutting, and labor costs are often the largest cost category.”
Declining job growth is likely needed to reduce inflation and recalibrate the economy after several years of pandemic disruption, the economists argued, and would likely be a key factor in the Fed starting to cut rates again in 2024.
“Regardless of what the eventual peak in rates may be, Fed officials have indicated recently that it is equally important how long rates remain in that restrictive setting,” the economists explained. “But even taking them, we think there will be enough evidence of sustained deflation that could drag the economy down in 2024. Assuming the economy slips into recession later next year and the loss significant positions as a result, we see the funds rate. being reduced by 50bp per quarter starting in 2Q24, leaving the funds rate at 3.5% by the end of 2024.”
Another reason a recession wouldn’t affect the kind of economic storms of the past: Investors and CEOs have been bracing for a downturn since the Fed began hiking rates.
“If we do experience a downturn next year, it will be the most well-telegraphed recession in recent memory,” the economists wrote. “That fact alone should change the nature of the delay.”
Grace O’Donnell is an editor at Yahoo Finance.
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