With inflation soaring, bond yields climbing, and the Federal Reserve poised to make large interest-rate increases, many economists and investors are worried about the possibility of recession.
Fannie Mae economists are among them, predicting “a modest recession in the latter half of 2023.”
The forecast came in a report on the economy and housing market.
“We see a contraction in economic activity as the most likely path to meet the Federal Reserve’s inflation objective given the current rate of wage growth and inflation,” said the economists, led by Doug Duncan.
The Fed has a 2% inflation target. The Fed’s favored inflation indicator, the personal consumption expenditures price index, soared 6.4% in the 12 months through February, a 40-year peak.
Average hourly earnings gained 5.6% in the 12 months through March.
Hawkish Monetary Policy
“Since our last forecast, monetary policy guidance has shifted in a hawkish direction, and markets have responded with rapid increases in interest rates, signaling a belief that brisker tightening is likely to occur,” the economists said.
Interest-rate futures traders see an 89% probability that the Fed will lift interest rates by at least 225 basis points for the rest of the year. The 10-year Treasury yield has jumped 140 basis points to 2.91% so far this year.
“While a soft landing for the economy is possible, which is where inflation subsides without economic contraction, historically such an outcome is an exception, not the norm,” the economists said.
Low Odds of Soft Landing
“With the most recent inflation readings at levels not seen since the early 1980s and wage growth exceeding that which is consistent with a 2% inflation objective, we believe the odds of a soft landing are even lower,” they said.
Getting to 2% inflation would likely require “economic growth slowing sufficiently to lead to a rise in the unemployment rate, which would cool wage and price pressures,” the economists said.
They expect economic growth to total 2.1% this year. But next year they see a contraction of 0.1%. They think unemployment will max out around 6% in 2024. It totaled 3.6% in March.
As for housing, the Fed’s rate hikes will boost mortgage rates, leading to “slower housing activity,” the economists said. They now forecast home sales will drop 7.4% this year and 9.7% in 2023.
The Fannie Mae home price index, which registered annual growth of 20% in the first quarter, will slide to 10.8% growth by year-end and then 3.2% by the end of 2023, the economists predicted.
