US unemployment rate set to top 5.5%, economists predict

The Federal Reserve’s efforts to stamp out high inflation will push the U.S. unemployment rate to at least 5.5% as the world’s largest economy tumbles into a recession next year, a majority say. leading academic economists interviewed by the Financial Times.

The latest survey, conducted by the University of Chicago Booth School of Business’s Initiative on Global Markets in partnership with the FT, suggests waning optimism about the central bank’s ability to rein in price pressures without lead to significant job losses.

Despite insistence from Fed Chairman Jay Powell and other top officials that a “soft or soft landing” is possible given the historically tight labor market, most economists polled see a period More pain on the horizon, even as the central bank slows the pace of its interest rate increases and takes stock of what it still needs to squeeze the US economy.

Of the 45 economists polled between Dec. 2 and Dec. 5, 85% predict the National Bureau of Economic Research — the arbiter of when recessions begin and end — will declare one by next year.

While most economists expect the coming contraction to be short-lived – with gross domestic product growth still registering a 1% gain by the end of next year – more than half prepare for the unemployment rate to rise significantly from its current level of 3.7% to between 5.5% and 6.5%.

A handful of economists predicted an even more dire outcome, with the unemployment rate approaching or exceeding 7%.

“A soft landing is extremely difficult and it almost never happens in history,” said Giorgio Primiceri, a professor at Northwestern University who was involved in the survey.

“I don’t think the Fed needs to hit the brakes with extreme pressure. They need to do it a bit more and they may stop at some point, but it will probably be too late to avoid a recession.

The survey results come as the Fed is set to return to a half-point hike next week after four consecutive 0.75 percentage point hikes, which would take the federal funds rate to a new target range of 4.25% to 4.50. percent.

More than 60% of participating economists expect the Fed to raise its benchmark key rate to at least 5% as it seeks to bring inflation back to its 2% target, according to the poll.

For nearly 20% of respondents, the federal funds rate will eventually peak between 5.5% and 6%, while a further 5% of respondents believe it will exceed 6%. This is an increase from just 20% of respondents in September who thought the maximum rate would exceed 5%.

An overwhelming majority sees the central bank wrapping up its rate hikes in the second quarter of next year or earlier and for the bulk of the economic effects to be felt in the second half of 2023 or early 2024.

Meanwhile, the US housing market, which has already begun to collapse under the weight of skyrocketing mortgage rates, is expected to collapse further as economic activity comes to a halt. Most economists expect the national Case-Shiller home price index to drop 1% next year, but the range of possible outcomes is wide. More than 60% of economists who predicted a fall in the price index estimated that the decline could exceed 10% by the end of 2023.

Contrary to current investor expectations, 60% of respondents expect the Fed to keep its cool next year and not start cutting interest rates until at least the first quarter of 2024, as senior officials have pointed this out.

“The message sent by the Fed is clear: the restrictive policy will remain in place until inflation comes down,” said Ana María Herrera of the University of Kentucky, describing the likelihood of the Fed reversing course. by the end of next year as “rather weak”. ”.

At this point, “core” inflation – as measured by the personal consumption expenditure price index – should still be high at 3.5%. By December 2024, almost half of economists expect this measure of inflation to have fallen below 3%, although almost a quarter say it is “somewhat” or “ very” likely to be above that level at this point.

Brad DeLong, a survey participant from the University of California, Berkeley, said he was much more confident today that price pressures are not taking root in the economy, not least because future inflation expectations remain under control. The biggest concern, he said, is that the Fed is overreacting at this point and causing unnecessary economic damage.

“The major risk is on the downside – that the Federal Reserve will overdo it and we end up in secular stagnation with interest rates back to zero and no one being able to revive the economy.”