We are now a year on from the first central banks shifting into tightening mode and raising policy rates to bring inflation back under control. This central bank tightening trend broadened and accelerated in spring 2022 in response to the exogenous shock to commodity prices when Russia invaded Ukraine. So, as we reach its first anniversary, it’s worth assessing how successful the monetary tightening has been and where the risks of a policy mistake are most acute. 

USA

The problem in the USA is that, unlike Europe, the inflation has largely been driven more by domestic excess demand than by the (still evident) exogenous shock of energy price increases. I would argue that the economic damage sustained during the 2020 pandemic recession was more than offset by the fiscal stimulus packages implemented in 2021, putting the Fed in the position of now having to correct that shift in current and expected inflation.

We, along with many other forecasters, expect the Fed Funds rate to peak in the mid-4s, resulting in a relatively short shallow recession in the first half of 2023 designed explicitly to deflate the economy. And on some indicators, it looks as though we are heading in that direction. Credit conditions have tightened rapidly – something we in the real estate sector have seen with a vengeance over the past couple of months – with a commensurately deflationary impact on asset prices and liquidity. 

Meanwhile, in the poker-hot labour market, job openings may still be surprising on the upside, but the quit rate looks as though it’s peaking as some of the very generous pay packages are taken off the table. We’ve also seen house price inflation decelerate – though not (yet?) outright falls in for-sale house prices. And, while leasing activity in the for-rent sector remains robust, the rental rate increase has also slowed. 

So maybe we are in for a soft landing that helpfully deflates, but doesn’t push the US into a prolonged and severe recession.

My concern is that – candidly – I’ll be proved wrong both on the timing and the magnitude of the US recession.