Due to recent bank closures and the Federal Reserve’s ongoing tightening of monetary policy to cool off inflation, experts now expect a recession to emerge in the second half of 2023, according to analysis by Fannie Mae’s Economic and Strategic Research (ESR) Group.
Prior to the pressure on the banking sector stemming from the closures of Silicon Valley Bank (SBV) and Signature Bank and reports of stronger-than-expected economic data, the ESR Group had predicted a recession in the second quarter this year. However, recent economic data and events has shifted the mortgage giants' forecast.
"The recent events may act as the catalyst that tips an already precarious economy into recession, primarily via the combination of tighter lending standards among small and midsized regional banks and weakened business and consumer confidence," the ESR group said in a statement.
However, the group said it doesn’t expect a recession similar to the financial crisis of 2008. Instead, it believes a potential recession in 2023 would echo that of the Savings & Loan Crisis from the 1980s, because of the "significant interest rate rises that set in motion banking system stress and the resultant macroeconomic effects that contributed to a modest recession in 1991."
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Prior to the ESR Group’s latest economic forecast, many experts had been predicting a recession for 2023. These have included Chase, Bank of America, Citigroup and First National Bank of Omaha (FNBO).
"Economic downturn is likely in the U.S. as most economic indicators currently point to a deceleration at the minimum and/or probable contraction," FNBO said in its 2023 Economic Outlook Report. "Aggressive Fed monetary tightening and higher interest rates may negatively impact economic growth."
However, Fed officials say an easing of interest rate hikes soon may be possible. Most recently, the central bank raised interest rates by 25 basis points in March, despite banking turmoil. The Fed has raised interest rates several times in 2022 and this year in order to reduce inflation.
"Since our previous FOMC meeting, economic indicators have generally come in stronger than expected, demonstrating greater momentum in economic activity and inflation," Federal Reserve Chair Jerome Powell told reporters at a press conference. "We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes."
"We no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation," Powell continued.
The banking system's troubles may also contribute to a less aggressive interest rate environment, according to some analysts.
"Recent bank failures will force other financial institutions to work towards improving their liquidity position," the Credit Union National Association (CUNA) said in a statement. "It could mean less borrowing for households and businesses. "This coupled with the high cost of borrowing is expected to further slow economic activity, hiring and inflation."
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As the country may enter a recession, inflation is still affecting the wallets of many Americans, reports have suggested. In fact, nearly 74% of workers around the globe said the cost of living and inflation were the top drivers of stress, according to a recent study by Fidelity Investments.
Plus, inflation fears have spread among businesses. Notably, 54% of business owners cited inflation as their top concern for the first three months of the year, according to the U.S. Chamber of Commerce's Q1 Small Business Index. That marked the fifth consecutive quarter that respondents cited inflation as their biggest stressor.
Nonetheless, the rise of inflation has been slowing down in recent months. Inflation increased by 6% year-over-year in February, according to the latest Consumer Price Index (CPI) data released by the Bureau of Labor Statistics (BLS). That’s a drop from its peak in June, when the CPI increased by 9.1% year-over-year.
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