Home / Economy / Fed rate hike, inflation could drive the US economy into a 1990-style recession, Fitch warns

High inflation and the US Federal Reserve's jumbo-sized interest rate hikes could drive the economy into a 1990-style mild recession starting in the spring, ratings agency Fitch warned on Tuesday.

The ratings agency has also slashed GDP growth forecasts for the US for this year and next. US GDP is now expected to grow by just 0.5% next year, down from 1.5% in the firm's June forecast, Reuters reported quoting CNN.

High inflation will “prove too much of a drain" on household income in 2023, Fitch stated, shrinking consumer spending to the point that it causes a downturn during the second quarter of 2023.

The silver lining, however, is that the next recession may not be nearly as destructive as the last two major ones, the report said.

“The US recession we expect is quite mild," economists at Fitch Ratings said.

Wall Street on US inflation

Several Wall Street economists are holding firm to their bet that US inflation will slow substantially over the next year even as they're being forced to keep raising their predictions for coming months.

With most having shared the Fed's failure to predict the stubbornness of last year's price pressures, economists continue to be surprised by how much inflation is spreading through the economy. 

That was laid bare by last week’s core consumer price index for September, which beat the expectations of most forecasters by jumping to a 40-year high of 6.6%.

But even before that release, economists had boosted their inflation projections for the next few quarters. Despite that, many still see repeated interest-rate hikes from the Fed eventually closing much of the gap with the central bank’s 2% goal by 2024.

“I think everyone’s working backwards and saying, let’s take the Fed at their word that they’re resolved to bring inflation down," said Andrew Hollenhorst, chief US economist at Citigroup. 

Without projections that higher rates will stifle economic growth and boost unemployment, “then there wouldn’t be this expectation that inflation would move lower."

As per the latest Bloomberg monthly survey of economists, the core personal consumption expenditures price index, which the central bank counts as a preferred inflation gauge, will show an average annual increase of 2.8% in the fourth quarter of next year and 2.6% in the first quarter of 2024. The survey was conducted before the latest CPI report.

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