By Alessandro Albano
Investing.com - Inflation in the U.S. showed signs of cooling in October, but despite this, the possibility of the world's leading economy slipping into recession in 2023, causing a domino effect on other economies, is very high.
The warning comes from the CEOs of major U.S. investment banks who, almost in unison, spoke of the risks the U.S. will face in the coming year, in a more pessimistic tone than shown by the latest International Monetary Fund projections released a few weeks ago.
JPMorgan (NYSE:JPM) CEO Jamie Dimon told CNBC channel, he was concerned about the effects of inflation on businesses and consumers, who still have $1.5 trillion in additional savings available, thanks to pandemic, programs will spend 10% more than in 2021.
"Inflation is eroding everything I just said and that a trillion and a half dollars will run out sometime midyear next year," Dimon said. "And so, when you're looking out forward, those things may very well derail the economy and cause this mild or hard recession that people are worried about."
Not the first time the number one U.S. investment bank warned investors of a coming "economic hurricane." Last June, Dimon stated that the hurricane is coming right now, and we don't know if it's a minor storm or Superstorm Sandy.
As for raising interest rates, with Fed Funds moving toward 5%, according to JPM's CEO this "may not be enough to contain inflation."
Concerns also shared by the other big names in global finance such as David Solomon, CEO of Goldman Sachs (NYSE:GS), who at an event organized by the Wall Street Journal warned of continued declines for equity markets even in 2023, with recession probabilities for the U.S. economy of "about 2-out-of-3"
According to the GS, equity, crude oil and real estate (both commercial and residential) will continue to show a downtrend, which is countered by the strength of the U.S. dollar.
In addition, for Solomon, the probability of a "soft landing" - or a slowdown in inflation that does not tip the economy into recession - for the U.S. economy "at only 35%," and he added that "it is not surprising that we are in a period of rate hikes," as the Fed is trying to reduce inflation caused by large fiscal stimulus and the "black swan" effects of the Russian war in Ukraine.
"The market is making an assumption that we’ll reach the terminal rate sometime soon and the [Fed] will bring rates back down, and if you look at most tightening cycles, historically, after some period of time, you do see a reversal," Solomon said. "But I think we're still early in this – I think it's uncertain."
Looking at the projections, the recession model calculated by the New York Fed estimates a 38% probability of a recession in the U.S. in November 2023 (readings above 30% are historically harbingers of an economic downturn), while for the Fed's latest dot plots the terminal rate for 2023 is given as 4.6%.
A ceiling not shared by all FOMC members, since according to the Cleveland Fed's nowcast model, which has proven quite accurate this year, the core rate is expected to weaken only marginally to 6.26%. Whether this is enough for the Fed to set the dot plot for 2023 just above 5% is at least debatable.