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Higher inflation + Rising interest rates = Slower growth

Russell Price | Chief Economist – Ameriprise Financial
April 12, 2022

Key Points

  • Recession risks? Despite excessively high inflation and what could be an aggressive Fed response, we believe the U.S. economy is most likely to avoid a near-term recession.
  • Can the Fed shake inflation’s hold? Higher interest rates are meant to reduce demand but much of today’s inflation problems reside on the supply side of the ledger.
  • Reduced outlook: The war in Ukraine and a more aggressive Fed have led us to lower our 2022 growth outlook. We now see the U.S. economy as growing at a 2.5% real rate.

High inflation and higher interest rates will weigh on the pace of economic growth in coming quarters. Overall, however, we believe U.S. fundamentals remain strong enough as to keep the economy on a positive path.

Inflation was already a significant drag on real economic activity upon entering 2022. Russia’s invasion of Ukraine in late February, further pushed some commodity prices materially higher, thus increasing inflation’s drag. In response, the Federal Reserve has laid-out a path for interest rates hikes this year that is more aggressive than previously expected.

Though these developments are direct negatives to the economic outlook, they are unlikely to fully over-power the economy’s strong fundamentals, in our view. Consumers remain in good financial shape, and we believe the job market is likely to remain strong. Corporate balance sheets and the financial system are in good health as well, in our opinion.

We believe recession odds remain below 50 /50 but given the dynamic circumstances of inflation, ongoing supply chain issues, fast rising interest rates, and the war in Ukraine, the risk has clearly increased. Should the economy slip into a recession, however, we believe it would be short and shallow given the strength of underlying fundamentals.

We now forecast U.S. real Gross Domestic Product (GDP) to grow by +2.5% from a prior +3.5% (coming into 2022 we had projected real growth at +4.5%). Additionally, we look for the Consumer Price Index to end the year at a level of approximately +5.5% versus our prior estimate of +3.7%.



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