46% Expect Peak Fed Funds Rate to be 500-550 bps; 92% Expect Peak Rate to be Achieved by mid-2023

58% Say the Fed Should Assess Impact of Earlier Rate Hikes; 50% Say This Should Occur in 2Q23

Washington, DC, December 6, 2022 – Today, SIFMA unveiled the results of its Economist Roundtable semiannual survey of the chief U.S. economists of 27 global and regional financial institutions.

“As we continue to turn the corner on the COVID-19 pandemic, the U.S. economy is now facing reverberating consequences due to rising inflation, a tight labor market, and hawkish federal monetary policy,” said Dr. Lindsey Piegza, Ph.D., chief economist and managing director at Stifel Financial Corporation and chair of SIFMA’s Economist Roundtable. “Looking to the coming year, we can expect many of these same risks to persist. While the United States is not currently in a recession, we can anticipate a potential mild recession in the first half of 2023.”

We highlight the following findings from the survey (populated between November 11 and 25):

THE ECONOMY

GDP growth expectations

• 2022 GDP growth expected at +0.3% (median forecast, 4Q/4Q); 2023 expected at -0.3%
• 83% of economists expect the long-term potential GDP growth rate of 1.5-2.0%, with 64% stating this is unchanged from pre-COVID estimates
• For 2022, the main factors impacting economic growth include: inflation, tight labor market, and U.S. monetary policy
• For 2023, the main factors impacting economic growth include: U.S. monetary policy, inflation, and recession threat

Risks to economic forecasts

• Upside – Inflation – demand side (consumer spending, fiscal stimulus), monetary policy, and inflation
• Downside – Inflation – supply side (energy crisis in EU, Russia/Ukraine, supply chain disruptions, China’s Zero COVID policy, energy shock), monetary policy, and inflation

Recession expectations

• None of the respondents believe the U.S. is already in a recession, while 83% of respondents believe the U.S. will enter in a recession
• If the U.S. enters a recession, 89% of respondents believe it will be mild, and 60% of respondents believe it will occur in 1H23

Employment and the consumer

• Unemployment rate forecasted to end 2022 at +3.7% and remaining at +4.5% in 2023 (4Q average)
• Respondents expect the labor force participation rate to increase to 62.3% in 2022 and 62.6% in 2023
• 64% of respondents expect the labor force participation rate to return to the ~63% pre-COVID average beyond 2023, with 36% responding never
• The factors respondents believe continue to drive the labor supply gap are health concerns around long COVID (55%), the Great Retirement (55%), and childcare issues (45%)

MONETARY POLICY

Fed Actions

• The most important factors to the Fed’s decision making include: persistently higher inflation, due to wage increases (100%), persistently higher inflation, due to supply chain issues (58%), and stronger U.S. consumer spending (33%)
• 100% of respondents expect the Fed to raise the target Federal Funds rate by 50 bps in December
• 46% of respondents expect the peak rate will be 500-550 bps
• 92% of respondents expect the peak rate to be achieved by mid-2023
• 58% of respondents think the Fed should pause and assess the impact of earlier rates hikes, with 50% of respondents indicating this pause should take place in 2Q23
• 80% of economists responded replied that the Fed should not be considering global monetary policy responses when making its decisions on its own policy moves
• 83% of respondents expect the Fed will not need to accelerate the pace of balance sheet reduction
• 73% of respondents expect the balance sheet to be $8.5 trillion by the end of 2022 and over $7 trillion by the end of 2023
• As to the Fed’s communication with markets around its timeline for monetary policy adjustments:
  • 64% of respondents indicated the communication is somewhat murky but decipherable
  • 91% of respondents replied no change since the November FOMC meeting

Inflation expectations

• CPI: +7.4% to end 2022, +3.1% to end 2023 (2021 actual 6.7%)
• Core CPI: +6.1% to end 2022, +3.3% to end 2023 (2021 actual 5.0%)
• PCE: +5.8% to end 2022, +2.9% to end 2023 (2021 actual 5.5%)
• Core PCE: +4.8% to end 2022, +2.9% to end 2023 (2021 actual 4.6%)
• 82% of respondents believe the Fed waited too long to raise rates, allowing inflation to get out of control
• 55% of respondents indicated the Fed is poised to make another mistake in tackling inflation, by overshooting
• 73% of respondents believe price pressures have become more structural or broad-based throughout the economy, but are split whether this has been the case for some time or a more recent event, 36.4% each
• 75% of respondents believe the price pressures are at their peak but will remain elevated for some time
• For 2022, the inflation rate – in terms of the PCE – is expected to be 5-6% (90% of respondents), and 2-3% or 3-4% (45% of respondents each) in 2023
• As to whether or not economists are confident the Fed can achieve its 2% goal in a sustainable way:
  • Based on the Fed’s commitment to the fight, 78% of respondents are very confident
  • Based on the effectiveness of the Fed’s policy, 91% of respondents are somewhat confident
• 55% of respondents expect inflation will not reach the Fed’s preferred 2% target until beyond 2024
• 55% of respondents expect a 15% to 25% probability the U.S. will experience structurally higher inflation over the longer run (defined as longer than three years from now)
• The factors listed as most important to core inflation forecasts: historically hot labor market, consumer spending on services, and domestic supply chain issues
• Top factors to push long-term inflation higher include: stickiness of wage increases, reversal of globalization, and sustained breakdown of supply chains
• Ranking the factors having the biggest impact on the aggregate inflation rate in order, economists replied: (1) demand side, (2) supply side, and (3) the labor component
• Ranking supply side inflation components, economists replied: domestic supply chain issues (port congestion, labor shortages), commodity price shocks (oil due to Russia/Ukraine war), and supply chain issues (China’s zero COVID policy)
  • 36% of respondents expect domestic supply chain disruptions to dissipate by 1H23
  • 64% of respondents believe President Xi will end China’s Zero COVID policy with 57% responding this will happen by 2H23
  • 90% of respondents believe current policy moves – specifically releasing the strategic petroleum reserves (SPR) – will not have a lasting impact on the price of oil
  • The key factors keeping pressure on the price of oil over the long run include: geopolitical tensions impact supply (Russia/Ukraine war, Saudi Arabia relations); strong demand heading into winter months on top of low supplies in Europe; and strong demand into winter/low supplies in the U.S.
  • 50% of respondents expect relief from other commodity price pressures by 1H23
• Ranking demand side inflation components, economists replied: consumer spending on services, consumer spending on goods, and fiscal spending
  • 64% of respondents believe all the fiscal stimulus was not necessary and became a main driver of inflation
  • 30% of respondents expect goods prices on an aggregate level to return to normal levels by 1H23 and another 30% by 2H23
  • 50% of respondents expect services prices on an aggregate level to return to normal levels by 2H23
• Labor component: 80% of respondents believe we are not in a wage-price spiral
  • With wages +4.7 in October (vs. +5.0% in September), 72% of respondents believe we have reached a peak in wage pressures
  • With wages accelerating ~5% for some time, 67% of respondents expect this to return to the historical +3.0% level (three-year pre-COVID average) by 2H23
  • 45% of respondents believe the U3 unemployment rate needs to increase to 4.50-5.00% to meaningfully impact inflation; to be reached by 2H23 (80% of respondents)
• Unlike in the 1970s, all of respondents believe the Fed’s strong rhetoric has kept inflation expectations in check
• 82% of respondents do not currently see any concern of disinflation
• 78% of respondents believe the greater long-term risk to the economy is stagflation
• 64% of respondents view the massive expansion of the government’s balance (>$7 trillion in fiscal spending) poses a moderate upside risk to inflation

Rate Estimates, Yield Curves, and Spreads

• The factors that have the greatest impact on expectations for long-term Treasury yields in 2023 include: inflation/inflation expectations, U.S. economic conditions, and U.S. monetary policy
• 36% of respondents expect the 10Y yield to end 2022 at 4.00-4.25%, and 40% expect the 10Y yield to end the 2023 at 3.50-3.75%
• 67% of respondents expect the 30Y mortgage rate to end 2022 at <7.00%, and all expect the 30Y mortgage rate to end 2023 at <7.00%
• For the two-year Treasury vs. 10-year Treasury (2s/10s) yield curve: 55% of respondents believe it will invert slightly more in 2022, while 38% of respondents believe it will invert markedly more in 2023
• For the three-month T-bill vs. 10-year Treasury yield curve: 50% of respondents believe it will invert slightly more in 2022, while 38% of respondents believe it will invert markedly more in 2023

FISCAL POLICY

Fiscal stimulus

• 82% of respondents believe sustained higher inflation should deter further fiscal spending
• 70% of respondents believe the Russia/Ukraine conflict will cause further international aid and therefore more U.S. fiscal spending
• 70% of respondents believe the (potentially) impending recession should deter further fiscal spending
• Looking at the Inflation Reduction Act:
  • 71% of respondents believe it will not be budget deficit reducing
  • 80% of respondents believe it will not help lower inflation
• 70% of respondents view the bigger risk to the economy is the government doing too much and further pressuring inflation, while 70% of respondents believe the government has already done too much, as fiscal (over)spending has been a main driver of inflation
• When considering additional stimulus, 57% respondents indicated government should consider the debt level as it could impede long-term growth (debt/GDP 121.1% as of 2Q22) or it could incite further inflation (57% of respondents); also all of respondents believe a debt/GDP level of 150%-175% would be concerning

The full report can be found here.

The 2022 mid-year survey report can be found here.

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SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development.

SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).