Wall Street is predicting a 2023 recession. Here are the red flags you should know about

The U.S. economy added nearly half a million jobs in March. The Dow Jones industrial average is within 6% of its record high. And U.S. households accumulated roughly $2.5 trillion in excess savings throughout the pandemic.

Still, despite all the good news, predictions of an impending recession are widespread on Wall Street.

Billionaire investors, former Federal Reserve officials, and now even investment banks have repeatedly warned that the economy may hit a wall in 2023.

Recession in the U.S. is brewing as the Federal Reserve is taking a more aggressive stance on raising interest rates to clamp down on inflation, according to economists at Deutsche Bank. 

With inflation at a 40-year high, they predict the Fed will raise interest rates by half a percentage point during the next three meetings in May, June and July. That’s in line with the Fed’s thinking, according to minutes from the latest meeting. 

When the Fed raises rates, it becomes more expensive to borrow money since interest rates on mortgages, credit cards and other loans increase in tandem. By taking such action, the Fed hopes to slow down the economy without causing a recession.  

Since the start of the pandemic, the central bank has supported the U.S. economy by maintaining near-zero interest rates that have helped spur lending. It has also flooded U.S. debt markets with cash in order to stimulate economic activity through an unconventional monetary policy called quantitative easing (QE).

Now, with pandemic restrictions fading and inflation moving to highs not seen in four decades, the Fed is faced with a difficult task: ensuring a so-called soft landing for the U.S. economy. The goal is to raise interest rates and end QE in order to cool economic growth and combat inflation—all without causing a recession.

Investing legend Carl Icahn—the founder and chairman of Icahn Enterprises who boasts an estimated fortune of over $15 billion—said in a March interview he believes the Fed isn’t up for the job.

The next US recession

While Deutsche Bank is the first major bank to forecast an imminent economic downturn, investors, both retail and professional, share the group’s gloomy outlook. According to a Bloomberg Markets Live survey conducted between March 29 and April 1, 48 percent of investors expect the US to fall into recession next year. Another 21 percent expect the downturn to happen in 2024, while 15 percent of the 525 respondents expect the recession to come as early as this year.

With the pandemic still lingering, the Russian invasion of Ukraine putting additional pressure on already surging consumer prices and Chinese lockdowns potentially disrupting supply chains, the economic outlook is currently clouded by uncertainties. And where there is clouds, there’s often a chance of rain, or, in this case, a recession.

Deutsche Bank became the first bank to predict a recession during the current inflationary era earlier this month, when it revised its global growth forecasts significantly down partly due to the war in Ukraine.

While shutdowns in parts of China are likely to add to inflation pressures, Hooper said he expects the country to perform better into next year once it gets past its current COVID-19 disruptions — which should, in turn, diminish the likely impact on the U.S.

On Tuesday, U.S. stocks DJIA SPX fell sharply. With the Nasdaq Composite COMP down more than 3% during the final hour of trading. Treasury yields were also broadly lower, with the 10-year rate TMUBMUSD10Y hovering below 2.76%. 

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