"US Recession Probability Drops to 40% Range... Interest Rate Cut in Q2 Next Year"

WSJ Economic Experts Survey
Inflation Slowdown and Tightening End... Growing Optimism for Soft Landing
Israel-Hamas War Remains a Variable

More experts have become optimistic about a soft landing for the U.S. economy next year. Although concerns about prolonged high interest rates remain, the slowdown in inflation has strengthened the view that the Federal Reserve (Fed) will effectively end its tightening cycle and that the U.S. economy can avoid a recession. Experts expect the Fed to begin cutting interest rates starting in the second quarter of next year.

According to the Wall Street Journal (WSJ) on the 15th (local time), a survey of 65 economic experts conducted from the 6th to the 11th showed that the probability of a recession next year dropped to 48%, down 6 percentage points from 54% in the previous survey in July. This is the first time in a year since mid-last year that the recession probability has fallen below 50%, according to the WSJ survey.

The main reason cited was that inflation has steadily declined, signaling that the Fed's tightening is entering its final stages. A strong labor market and growth rates exceeding expectations also supported the possibility of a soft landing. Accordingly, 59.4% of experts judged that the Fed has already ended its rate hikes. Responses expecting one more rate hike next month before ending tightening accounted for 23.4%, while 10.9% expected a rate increase in December.

Dirk Potter and Scone Anderson, economists at Canadian investment bank BMO, analyzed, "Banking turmoil has calmed, and the strong resilience of the labor market along with real income growth is supporting consumer spending demand," adding, "The probability of a U.S. recession continues to decline."

Experts participating in the survey forecast that the U.S. gross domestic product (GDP) growth rate for the fourth quarter of this year will rise 2.2% year-on-year, a significant upward revision from the previous forecast of 1%. However, the annual growth forecast for next year was lowered to 1% from the previous 1.3%. In particular, they predicted that the U.S. economic growth rate will slow and the unemployment rate will rise starting from the first half of next year. Experts expect U.S. GDP to increase by 0.35% in the first quarter and 0.6% in the second quarter of next year, while the unemployment rate is projected to rise from 3.8% in September this year to 4.3% in June next year.

Accordingly, experts expect the Fed to begin cutting interest rates in the second quarter of next year. However, they do not anticipate any economic shocks. The WSJ reported that experts believe the economy will continue to grow in 2024 and 2025, and although the unemployment rate will continue to rise, it will remain historically low at around 4%.

The U.S. 10-year Treasury yield, which surged amid expectations of prolonged Fed tightening, is expected to stabilize within the next few months. As of the 13th, the 10-year Treasury yield stood at 4.63%, with experts forecasting a decline to 4.47% by the end of this year and 4.16% by the end of June next year.

The WSJ analyzed, "Experts are confident in the Fed's ability to achieve a so-called 'soft landing' where inflation falls without a recession," adding, "82% of experts expect the Fed to bring inflation back to the 2% target within the next 2 to 3 years through the current 5.25?5.5% interest rate." The consumer price index (CPI) inflation rate is expected to fall to 2.4% by the end of 2024 and 2.2% by the end of 2025.

The main variable that could influence the U.S. economy was identified as the armed conflict between Israel and the Palestinian militant group Hamas. The warning is that a surge in energy prices caused by conflicts in the Middle East could lead to a rebound in inflation, negatively impacting the U.S. economy.

Brett Ryan and Matthew Luzzetti, economists at Deutsche Bank, said, "The possibility of a soft landing has undeniably increased over the past few months," but added, "However, headwinds such as reduced savings, tightening credit conditions, slowing income growth, and student loan repayments will intensify next year."

This content was produced with the assistance of AI translation services.