Federal Reserve Chairman Jerome Powell.
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- A US recession will hit in the second half of 2022, Bank of America predicted in a Wednesday note.
- The Fed’s pandemic stimulus is starting to fade, and an “inflation tax” is weakening the spending power of Americans, analysts said.
- The report comes as accelerating consumer prices give the Fed reason to maintain hawkish policy.
Bank of America analysts predicted a mild recession will arrive in the second half of 2022 as inflation shocks weigh on consumers and the US economy.
The forecast comes as consumer price growth accelerated to 9.1% in June, above the expected 8.8%, giving the Federal Reserve reason to stay on track with hawkish policy.
“Our previous baseline outlook for the US economy featured a growth recession (e.g., output growth remaining positive, but below our estimate of potential), but a number of forces have coincided to slow economic momentum more rapidly than we previously expected,” analysts wrote in a Wednesday note.
Financial conditions have tightened as the Fed leans into more rapid interest rate hikes. That led BofA to revise its previous forecast where the US avoids an outright contraction.
BofA now expects GDP to decline by 1.4% in the fourth quarter of 2022 compared to the year prior, followed by a 1.0% increase in 2023.
“The Fed has communicated its desire to restore price stability and a willingness to accept at least some pain in labor markets in the process. We look for the Fed to raise the target range for the federal funds rate to 3.25-3.5% by year-end, including another 75bp hike at the upcoming July FOMC meeting,” analysts wrote.
That should be followed by a 50-basis-point hike in September, then more traditionally sized 25-basis-point hikes afterwards, BofA added.
Meanwhile, the Fed’s stimulus during the pandemic is beginning to fade, and high prices are digging into the spending power of consumers more than anticipated, the analysts noted.
This so-called “inflation tax” means real consumption on goods and services has declined, according to the note.
“With much of the recent rise in inflation coming from food and energy prices, commodities that face relatively inelastic demand in the short run, households may have less available for discretionary purchases,” BofA said.
