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.
"There are already signs that firms’ appetite to hire is easing, and we expect that to continue next year to the point where we see outright declines in the monthly job figures in 2H23," the economists stated. "Markets are now rewarding companies that prioritize cutting costs, and labor costs are often the largest cost category."
Declining job growth is likely required to bring down inflation and recalibrate the economy after several years of pandemic disruptions, the economists argued, and would likely be a key factor for the Fed to start cutting rates again in 2024.
"Whatever the eventual peak in rates might be, Fed officials lately have been stressing that equally important is how long rates remain in that restrictive setting," the economists explained. "But even taking them at their word, we do think there will be enough evidence of a lasting disinflation that we project easing in 2024. Under the assumption the economy slips into recession later next year and significant job losses ensue, we see the funds rate being reduced 50bp per quarter starting in 2Q24, leaving the funds rate at 3.5% by ’24 year-end."
Another reason why a recession would not necessarily wreak the kind of havoc past economic storms: Investors and CEOs have been bracing for a downturn since the Fed started hiking rates.
“If we do have a downturn next year, it will be the most well-telegraphed recession in modern memory,” the economists wrote. "That fact alone should change the nature of the slowdown."
Grace O'Donnell is an editor for Yahoo Finance.