The Federal Reserve will need to strike a balance between inflation and soaring interest rates to avoid a recession in 2023.
That’s according to the National Retail Federation’s chief economist Jack Kleinhenz, who discussed the potential of a recession this year in his monthly economic review for January.
In an effort to curb spending and rising prices, the Federal Reserve has implemented a series of interest rate hikes in recent months. In December, it raised rates another half a percentage point, marking the highest level in 15 years. While these rate hikes are aiming to ease spending and cool inflation, they could potentially increase the chances of a recession in 2023 as well, Kleinhenz said.
“It is impossible to know whether the Fed’s efforts will lead to a recession or how bad one might be if it does occur, but continuing rate hikes increase the chances,” Kleinhenz wrote in his monthly review, explaining how rate hikes can take 18 months to have an effect on inflation.
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Other economic leaders have offered similarly grim predictions for the new year. International Monetary Fund Managing Director Kristalina Georgieva told CBS News earlier this week that a third of the global economy will be in recession this year.
At the same time, there are some signs of recovery. Inflation, while still high compared to last year, has begun to come down in recent months. In November, consumer prices rose by 7.1% compared to last year, according to data from the U.S. Bureau of Labor Statistics, marking the smallest 12-month increase since the period ending in December 2021 and a slowdown from October’s 7.7% growth.
“While inflation is falling, it remains in the pipeline and is not going away,” Kleinhenz wrote.
The labor market has remained strong and rising wages have bolstered consumer spending overall. The U.S. economy added 263,000 jobs in November, beating estimates of 200,000 jobs. And retail sales grew 7.2% year over year for the first 11 months of 2022, which Kleinhenz said is “clearly antithetical to a recession.”
November sales specifically increased 5.6% over last year, according to NRF estimates, which puts holiday season sales on track to grow between the forecasted 6% to 8% over 2021.
