The economy is slowing… but not slowing fast enough


Oct. 17, 2022

Key Points

  • Inflation remains the key. Inflation’s path will dictate how high Fed officials will take interest rates, thus implying how much drag will be inflicted on the economy. 
  • A shallow 2023 recession now looks likely. We believe any downturn that may occur would likely be shallow. Investors should also consider how much of this prospect is already factored into markets.
  • Energy prices remain a key risk. Energy prices have been on the wane the last several weeks, but low inventories and ongoing market disruptions leave the space susceptible to renewed problems.

Around the world, central banks are putting the brakes on economic activity via higher interest rates, an effort designed to reduce inflation. In few places has this been seen more prominently than here in the U.S. where the Federal Reserve has hiked its overnight lending rate (the fed funds rate) by 3.0 percentage points since March (from 0% to a recent range of +3.00% to 3.25%).

Despite the Fed’s efforts, economic activity has remained fairly resilient. Manufacturing activity, consumer spending, and personal income all continue to grow, and the job market has remained robust.

Financial markets have responded unfavorably to reports of ongoing expansion. The idea is, the longer economic activity fails to slow, the longer inflation is likely to remain high, thus the higher Federal Reserve interest rates are likely to rise. For markets, good news has become bad news.

Read the full report.