Wells Fargo believes the US will fall into recession after the Fed implements the biggest rate hike since 1994

Wells Fargo economists said Wednesday they expect the U.S. to fall into recession in 2023 after the Federal Reserve raised interest rates by the largest amount since 1994 in a bid to suppress inflation.

 

The Fed's actions caused a change in views on Wall Street regarding the prospects for US growth, with analysts of all countries saying that the risks of recession are increasing.

 

On Wednesday, the central bank raised interest rates by 75 basis points — far more than the traditional 25 basis point hike — to bring the target range of the federal funds rate to 1.5 to 1.75%.

 

Fed officials said that in the current state of affairs, they expect to raise rates to about 3.8% in 2023.

 

Wells Fargo said a sharp increase in interest rates that would push borrowing costs across the economy would likely trigger a "mild recession" in mid-2023.

 

The bank's chief economist, Jay Bryson, previously believed that the Fed would be able to curb inflation without a sharp slowdown in growth.

 

"In our view, the recession will be more or less equivalent in scale and duration to the recession of 1990-1991. That recession lasted two quarters, and the peak of the decline in real GDP from peak to peak was 
real GDP by 1.4," Bryson said in a note to clients on Wednesday.

 

Wells Fargo wasn't the only one who became more pessimistic about the U.S. economy on Wednesday.

 

Sima Shah, chief strategist at Principal Global Investors, said the Fed's updated economic forecasts indicated a recession could begin even if Chairman Jerome Powell told reporters that such a fate could still be avoided.

 

The Fed abandoned its "flawless disinflation" scenario, instead acknowledging that unemployment is likely to rise if they have any hope of lowering inflation," she said.

 

"And while a recession doesn't directly appear in their forecast, a 0.5% increase in the unemployment rate by the end of 2024 definitely indicates a recession."

 

The Fed's own "dot chart," which shows officials' views on where interest rates are headed, showed that borrowing costs are likely to fall to about 3.4% in 2024. This suggests that policymakers expect to have to cut rates again as the economy slows.

 

"Tougher and faster measures entail economic costs," said James Knightley, chief international economist at Dutch bank ING. "Rising recession risks mean that rate cuts will be on the agenda in the summer of 2023."