Benzinga - Bank of America (NYSE:BAC) released its 2023 global economic outlook report on Sunday, and the firm's economists are anticipating recessions in the U.S., Europe and the U.K. in the coming year.
The Federal Reserve will likely be unable to bring inflation under control without tipping the U.S. economy into a recession, according to economist Ethan Harris.
Inflation will eventually subside, but rates will likely need to go higher and stay higher for a while before the Fed can declare victory, he explained.
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Interest Rate Outlook: Harris projects two more 0.5% Fed interest rate hikes in December and February, and another 0.25% rate hike in March, bringing the terminal fed funds rate range to between 5% and 5.15%. However, he does not expect the Fed will begin cutting interest rates again until December 2023 and projects the fed funds target range will be back down to between 2.75% and 3% by the end of 2024.
"A weak labor market, with the [U.S. unemployment rate] peaking around 5.5% in 1Q 24, should allow core PCE inflation to slow to 3.1% and 2.2% y/y by end-23 and end-24, respectively," Harris said.
GDP Growth Projections: The one exception to the weak global economy in 2023 may be China. Harris said he expects delayed COVID-19 reopenings in China that will boost GDP growth from 3% in 2022 to 5.5% in 2023.
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Unfortunately for U.S. investors, Harris trimmed his full-year 2022 U.S. GDP growth estimate from 4% to 1% and his 2022 global GDP growth forecast from 4.3% to 3.3%. Looking ahead, Harris anticipates U.S. GDP will decline 0.4% in 2023, down from his previous forecast of 2.2% growth.
Benzinga's Take: A shrinking economy is generally not bullish for the SPDR S&P 500 ETF Trust (NYSE: SPY (NYSE:SPY)) for obvious reasons. If the U.S. does spend the first three quarters of 2023 in a recession, it's unlikely the S&P 500 will be making new highs anytime soon.
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