Federal Reserve Continues Quest to Slow U.S. Economy

Chief Economist Eugenio Alemán and Economist Giampiero Fuentes examine the factors which will contribute to the U.S. economy's path forward in 2023.

To read the full article, see the Investment Strategy Quarterly publication linked below.

Key Takeaways:

  • 2022 started on a positive note but was derailed by the Russian invasion of Ukraine which severely impacted food and energy prices globally.
  • Still-strained supply chains, the large accumulation of savings during the pandemic, and a strong labor market made it impossible for inflation to come back down, triggering a very strong response from the Federal Reserve (Fed).
  • The Fed is expected to continue increasing the fed funds rate until March of 2023, taking the terminal federal funds rate for this cycle to 4.75% to 5.00%.
  • We expect inflation to be below 3% by the end of 2023. This will require the Fed to stay put for the whole of 2023 as inflation will not go down to the 2% target until well into 2024.
  • We are forecasting a mild recession in 2023, during which we expect the economy to remain flat, and to start growing again at a rate of only 0.8% during 2024.

The current decade was dubbed by many as the ‘new Roaring '20’s. However, as we stated in our presentation of May 2021, “It would be unlikely as there are significant psy­chological, demographic, and structural dynamics that suggest the unfettered elevated growth trajectory of the 1920s will not be duplicated in the upcoming decade.” In fact, in just three years the world has experienced a global pandemic, a recession, and many countries are likely to experience another recession in 2023 due to efforts by cen­tral banks to bring down inflation rates.