How great is the weight of financial conditions on US GDP growth?
Tightening US financial conditions over the past year will likely trim 0.2ppts from Q4 2022 GDP growth. This drag will not go away in early 2023 as financial conditions affect the economy with a lag and a noticeable easing is unlikely to occur.
What you will learn:
- The Fed should proceed cautiously since demand is poised to cool and monetary policy cannot fix supply-side shocks that have pushed inflation to multi-decade highs. The policy rate is well above the neutral rate, and overtightening will increase the odds of a recession next year. We expect a 50bps hike at this week’s December FOMC meeting and a 25bps increase in February 2023 to end the current tightening cycle, putting the terminal fed funds rate at 4.75%.
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