The Looming Possibility of a US Recession

by Trent Wiseman | September 28, 2023

Since the beginning of the interest rate hiking cycle in March 2022 there has been a significant amount of speculation as to when the U.S., and possibly the global economy, would enter a recession. The consensus estimate was for the U.S. to enter a recession midway through 2023. However, as of September 2023 the U.S. economy is still looking strong with a possible recession only occurring sometime in the second half of 2024, unless the Fed can engineer a soft landing.

According to a report from the Chicago Fed the tightening monetary policy seen since March 2022 will be sufficient to secure a soft landing in 2024. Their report found that real GDP has declined by 5.4% while CPI has declined by 7.1% over the same period, relative to a base case scenario whereby there had been no monetary policy tightening. The Chicago Fed’s report further concludes that there will still be a further 3% drop in GDP and 2.5% drop in CPI as the lagging effects of the tight policy catch up to the economy. The conclusion is that the effects already seen from the interest rate hiking cycle coupled with the lagging effects still to be seen will bring inflation back into the Fed’s target range pf 2%, while simultaneously avoiding a recession.


Figure 1

Nevertheless, BCA Research team present a different view from the Chicago Fed, seeing a recession in the US by the middle of 2024. This outlook arises from the significant challenges associated with keeping inflation at the 2% target, especially where monetary policy’s capacity to influence is constrained. Given the present interest rate environment, the Fed finds itself with limited scope to manage inflation should it exceed the 2% threshold in 2024.

 The prospect of inflation resurgence arises as the economy nears full employment. At this point, effectively managing both inflation and unemployment becomes a balancing act. Increased GDP growth and resultant employment can set the scene for an inflationary upswing. Consequently, this elevated inflation can trigger a negative feedback loop within the economy.

As one individual curbs spending, due to the impact of higher inflation and increased in interest rates, the earnings of another individual, reliant on the former’s spending, reduces. This chain reaction result in reduced wages, increased unemployment, and eventually a recession.

Traditionally, the only viable strategy to maintain the balance in such circumstances, thereby staving off a recession and preventing inflation, revolves around central banks maintaining interest rates close to a neutral rate. Achieving this is no simple task, particularly in light of the 525-basis point increase in the Fed rate since 2022, coupled with an average 18-month lag in the effects of monetary policy adjustments and the challenge of discerning the actual neutral rate.These risks are highlighted by the fact the U.S. has always entered a recession when the unemployment rate increased by more than 0.3%.

Figure 2


Despite the looming risks of a recession the U.S. is in a far superior position to the rest of the world, particularly in relation to many of its G10 peers. The U.S. dollar always strengthens during times of economic uncertainty. This was seen when the DXY Index, which tracks the strength of the dollar against a basket of six currencies, peaked at 114.78 in September 2022. A strong dollar benefits the U.S. in terms of global trade where the dollar is still the world’s reserve currency and account for over 85% of global trade. This coupled with the fact that the U.S. has the highest real interest rate when compared to its G10 peers

This means that the Fed has a far greater ability to engineer a soft landing, by having greater freedom to cut interest rates compared to their peers.

Figure 3


The timing, likelihood and severity of a recession in the U.S. remains a point of debate among experts. While the possibility of a soft landing is there, the ability for the Fed to successfully engineer and navigate this scenario is improbable even with the flexibility offered by the stronger dollar and higher real interest rates.

Do you need assistance with managing your currency risk? Contact Dale Petersen on 021 819 7802 or at We’d love to connect with you.


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