Experts predict a “Category 1 Economic Hurricane” for 2023

The economic hurricane that JPMorgan CEO Jamie Dimon warned about in June may be less intense than originally feared, according to a new report from the bank.

On Wednesday, JPMorgan economists Michael Feroli and Daniel Silver wrote that they see the U.S. in a “mild recession” in the second half 2023 as the Fed looks to complete its mission to flatten inflation.

“We’re effectively looking for a Category 1 economic hurricane,” the economists wrote. “What are the risks? Weakness could build on itself, requiring a larger response by the Fed to get the economy back on track.”

The note comes on the heels of a better-than-expected Consumer Price Index (CPI) report, which showed that there are signs that prices are beginning to moderate amid persistently-high inflation.

The market rallied following the report as investors wondered how the positive inflation news would alter the Fed’s course. Central bank officials, for their part, reiterated that more interest rate hikes would be need to quell inflation while also acknowledging the encouraging print.

Feroli and Silver see the Fed continuing to tighten monetary well into 2023 before pausing. The economists laid out expectations that Federal Reserve will raise the federal funds rate by another 100 basis points, with a 0.50% hike coming in December and two additional 0.25% increases in February and March.

That would bring the federal funds rate near 5%, a level of financial tightening that many economists think would certainly push the U.S. economy into a recession.

At the same time, the U.S. economy has remained relatively resilient: Job growth has remained fairly durable in the face of what has been the Fed’s most aggressive tightening cycle in decades while consumers continue to spend — albeit less and less on discretionary items.

The tight job market will likely deteriorate in the coming months, Feroli and Silver warned. And even in a mild-recession scenario, a weaker labor market at the hands of the Fed may cause the U.S. to shed over 1 million jobs by mid-2024.